|                                                                                         |  | 
|---------------------------------------------------------------------------------------- |  | 
|UNITED STATES SECURITIES AND EXCHANGE COMMISSION                                        
|Washington D.C. 20549                                                                   
|                                                                                        
|                                                                                         |  | 
|                                                                                        
|FORM 10-Q                                                                               
|                                                                                         |  | 
|                                                                                        
|QUARTERLY REPORT PURSUANT
 TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the quarterly period
 ended September 30, 2009                                      
|                                                                                        
|Commission
 File Number 0-20050                                                         
|                                                                                         |  | 
|                                                                                         |  | 
|                                                                                        
|PRINCETON
NATIONAL BANCORP, INC.                                                        
|(Exact
 name of registrant as specified in its charter)                                 

|                                                                 |                                      
|---------------------------------------------------------------- | -------------------------------------
|Delaware                                                         | 36-3210283                           
|(State
 or other jurisdiction
 of incorporation or organization) | (I.R.S.
 Employer Identification No.)
|                                                                 |                                      
|606 S. Main Street, Princeton, IL 61356                         
|(Address
 of principal executive offices and Zip Code)          
|                                                                
|(815) 875-4444                                                  
|(Registrants
 telephone number, including area code)           
|                                                                

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.

Yes x No o

Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
twelve months (or for such shorter period that the registrant was required to
submit and post such files).

Yes o No o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.

|                           |  |  
|-------------------------- |  | -
|Large
 accelerated filer   |  | o
|Accelerated
 filer         |  | o
|Non-accelerated
 filer     |  | x
|Smaller
 reporting company |  | o

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).

Yes o No x

As of October 15, 2009, the
registrant had outstanding 3,303,563 shares of its $5 par value common stock.

Page 1 of 40 pages







Part I: FINANCIAL INFORMATION

The
unaudited consolidated financial statements of Princeton National Bancorp, Inc.
and Subsidiary and managements discussion and analysis of financial condition
and results of operation are presented in the schedules as follows:

| |             |                                                                                       
| | ----------- | --------------------------------------------------------------------------------------
| | Schedule 1: | Consolidated
 Balance Sheets                                                          
| | Schedule 2: | Consolidated
 Statements of Income                                                    
| | Schedule 3: | Consolidated
 Statements of Stockholders Equity                                      
| | Schedule 4: | Consolidated
 Statements of Cash Flows                                                
| | Schedule 5: | Notes to
 Consolidated Financial Statements                                           
| | Schedule 6: | Managements
 Discussion and Analysis of Financial Condition and Results of Operations
| | Schedule 7: | Controls and
 Procedures                                                              

Part II: OTHER INFORMATION

Item 1A. Risk Factors

The
current volatility in economic conditions and the financial markets may
adversely affect our industry, business and financial performance. There have
been unprecedented disruptions in financial markets in the past twelve months,
including volatility in asset values and constraints on the availability of
credit. In response to these developments, the U.S. government has taken, and
may take further, steps designed to stabilize markets generally and strengthen
financial institutions in particular. The impact, if any, these financial
market events or these governmental actions might have on the Company and its
business is still uncertain and cannot be estimated at this time. Item 1A
(Risk Factors) of the Companys Annual Report on Form 10-K for the year ended
December 31, 2008 discusses some of the principal risks inherent in the
Companys business, including interest rate risks, liquidity risks, credit
risks, operational risks, risks from economic or market conditions and general
business risks among others. The current upheaval in financial markets has
accentuated each of these risks and magnified their potential effect on the
Company.

At
the same time, there has been a general weakening of the U.S. economy. To the
extent these economic developments continue to worsen, and to the extent
legislation or regulatory action adversely affects the U.S. economy, the
Companys access to capital or the credit quality of the Companys loan
portfolio, or imposes additional limitations or costs on the Companys business,
there could be an adverse impact on the Companys costs, credit losses, access
to capital or liquidity.

2

---



Item 6.
Exhibits

| |      |                                                                                                                                         
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 | Certification
 of Tony J. Sorcic required by Rule 13a-14(a).                                                                            
| |      |                                                                                                                                         
| | 31.2 | Certification
 of Todd D. Fanning required by Rule 13a-14(a).                                                                           
| |      |                                                                                                                                         
| | 32.1 | Certification of Tony J. Sorcic required by Rule 13a-14(b) and
 Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.  
| |      |                                                                                                                                         
| | 32.2 | Certification
 of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the
 Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

SIGNATURES

Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

PRINCETON NATIONAL BANCORP, INC.

|   |                                     |  |                                        |                    
|-- | ----------------------------------- |  | -------------------------------------- | -------------------
|By | /s/ Tony J. Sorcic                  |  | By                                     | /s/ Todd D. Fanning
|   | Tony J. Sorcic                      |  |                                        | Todd D.
 Fanning   
|   | President & Chief Executive Officer |  | Executive VP & Chief Financial Officer
|   | October 30, 2009                    |  | October 30, 2009                      

3

---



Schedule 1

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
CONSOLIDATED BALANCE SHEETS(dollars in thousands, except share data)

|                                                                                                                        |  |                                  |           |                    |   |           |  
|----------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | --------- | ------------------ | - | --------- | -
|                                                                                                                        |  | September 30,
 2009
 (unaudited) |           | December 31,
 2008 |  
|ASSETS                                                                                                                  |  |                                  |           |                    |   |           |  
|Cash and due from banks                                                                                                 |  | $                                | 15,332    |                    | $ | 20,163    |  
|Interest-bearing deposits with financial
 institutions                                                                  |  |                                  | 49,690    |                    |   | 98        |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|Total cash and cash equivalents                                                                                         |  |                                  | 65,022    |                    |   | 20,261    |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|Loans held for sale, at lower of cost or
 market                                                                        |  |                                  | 5,484     |                    |   | 2,155     |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|Investment securities:                                                                                                  |  |                                  |           |                    |   |           |  
|Available-for-sale, at fair value                                                                                       |  |                                  | 320,978   |                    |   | 236,883   |  
|Held-to-maturity, at amortized cost (fair
 value of $15,564 and $14,461)                                                |  |                                  | 14,984    |                    |   | 14,232    |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|Total investment securities                                                                                             |  |                                  | 335,962   |                    |   | 251,115   |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|Loans:                                                                                                                  |  |                                  |           |                    |   |           |  
|Loans, net of unearned interest                                                                                         |  |                                  | 772,208   |                    |   | 790,837   |  
|Allowance for loan losses                                                                                               |  |                                  | (7,759    | )                  |   | (5,064    | )
|                                                                                                                        |  |                                  |           |                    |   |           |  
|Net loans                                                                                                               |  |                                  | 764,449   |                    |   | 785,773   |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|Premises and equipment, net of accumulated
 depreciation                                                                |  |                                  | 28,563    |                    |   | 29,297    |  
|Land held for sale, at lower of cost or
 market                                                                         |  |                                  | 2,354     |                    |   | 2,354     |  
|Federal Reserve and Federal Home Loan Bank
 stock                                                                       |  |                                  | 4,230     |                    |   | 4,211     |  
|Bank-owned life insurance                                                                                               |  |                                  | 22,308    |                    |   | 21,588    |  
|Accrued interest receivable                                                                                             |  |                                  | 9,543     |                    |   | 9,693     |  
|Other real estate owned                                                                                                 |  |                                  | 16,182    |                    |   | 2,487     |  
|Goodwill                                                                                                                |  |                                  | 24,521    |                    |   | 24,521    |  
|Intangible assets, net of accumulated
 amortization                                                                     |  |                                  | 3,560     |                    |   | 4,207     |  
|Other assets                                                                                                            |  |                                  | 4,881     |                    |   | 5,468     |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|TOTAL ASSETS                                                                                                            |  | $                                | 1,287,059 |                    | $ | 1,163,130 |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|LIABILITIES                                                                                                             |  |                                  |           |                    |   |           |  
|Deposits:                                                                                                               |  |                                  |           |                    |   |           |  
|Demand                                                                                                                  |  | $                                | 110,116   |                    | $ | 110,559   |  
|Interest-bearing demand                                                                                                 |  |                                  | 337,780   |                    |   | 246,714   |  
|Savings                                                                                                                 |  |                                  | 65,424    |                    |   | 61,089    |  
|Time                                                                                                                    |  |                                  | 551,493   |                    |   | 543,770   |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|Total deposits                                                                                                          |  |                                  | 1,064,813 |                    |   | 962,132   |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|Borrowings:                                                                                                             |  |                                  |           |                    |   |           |  
|Customer repurchase agreements                                                                                          |  |                                  | 50,025    |                    |   | 35,532    |  
|Federal funds purchased                                                                                                 |  |                                  | 0         |                    |   | 6,500     |  
|Interest-bearing demand notes issued to the
 U.S. Treasury                                                              |  |                                  | 790       |                    |   | 2,441     |  
|Advances from the Federal Home Loan Bank                                                                                |  |                                  | 32,498    |                    |   | 32,493    |  
|Trust preferred securities                                                                                              |  |                                  | 25,000    |                    |   | 25,000    |  
|Note payable                                                                                                            |  |                                  | 0         |                    |   | 16,050    |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|Total borrowings                                                                                                        |  |                                  | 108,313   |                    |   | 118,016   |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|Other liabilities                                                                                                       |  |                                  | 10,921    |                    |   | 10,511    |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|TOTAL LIABILITIES                                                                                                       |  |                                  | 1,184,047 |                    |   | 1,090,659 |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|STOCKHOLDERS EQUITY                                                                                                    |  |                                  |           |                    |   |           |  
|Preferred stock, no par value; 100,000
 shares authorized; 25,083 shares issued and outstanding at September 30, 2009   |  |                                  | 24,951    |                    |   |          |  
|Common stock: $5 par value, 7,000,000
 shares authorized; 4,478,295 shares issued                                       |  |                                  | 22,391    |                    |   | 22,391    |  
|Common stock warrants                                                                                                   |  |                                  | 150       |                    |   |           |  
|Additional paid-in capital                                                                                              |  |                                  | 18,417    |                    |   | 18,420    |  
|Retained earnings                                                                                                       |  |                                  | 55,575    |                    |   | 54,329    |  
|Accumulated other comprehensive income, net
 of taxes                                                                   |  |                                  | 5,505     |                    |   | 1,402     |  
|Less: Cost of 1,174,732 and 1,180,254
 treasury common shares at September 30, 2009 and December 31, 2008, respectively |  |                                  | (23,977   | )                  |   | (24,071   | )
|                                                                                                                        |  |                                  |           |                    |   |           |  
|TOTAL STOCKHOLDERS EQUITY                                                                                              |  |                                  | 103,012   |                    |   | 72,471    |  
|                                                                                                                        |  |                                  |           |                    |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                              |  | $                                | 1,287,059 |                    | $ | 1,163,130 |  

See accompanying notes to unaudited consolidated
financial statements

4

---



Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
(dollars in thousands, except share data)

|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|-------------------------------------------------------------------- |  | ---------------------------------------- | --------- | --------------------------------------- | - | --------- |  | ---- | --------- | - | - | --------- | 
|                                                                     |  | For the Three Months
 Ended September 30 |           | For the Nine Months
 Ended September 30 |  
|                                                                     |  | 2009                                     |           | 2008                                    |   | 2009      |  | 2008 |          
|Interest income:                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Interest and fees on loans                                           |  | $                                        | 10,951    |                                         | $ | 11,977    |  | $    | 33,494    |   | $ | 36,129    | 
|Interest on investment securities:                                   |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Taxable                                                              |  |                                          | 2,010     |                                         |   | 1,766     |  |      | 5,732     |   |   | 5,063     | 
|Non-taxable                                                          |  |                                          | 1,438     |                                         |   | 1,006     |  |      | 3,862     |   |   | 3,047     | 
|Interest on federal funds sold                                       |  |                                          | 0         |                                         |   | 37        |  |      | 0         |   |   | 66        | 
|Interest on interest-bearing time deposits in other banks            |  |                                          | 25        |                                         |   | 26        |  |      | 76        |   |   | 46        | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Total interest income                                                |  |                                          | 14,424    |                                         |   | 14,812    |  |      | 43,164    |   |   | 44,351    | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Interest expense:                                                    |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Interest on deposits                                                 |  |                                          | 4,829     |                                         |   | 5,771     |  |      | 15,079    |   |   | 18,250    | 
|Interest on borrowings                                               |  |                                          | 712       |                                         |   | 869       |  |      | 2,178     |   |   | 2,658     | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Total interest expense                                               |  |                                          | 5,541     |                                         |   | 6,640     |  |      | 17,257    |   |   | 20,908    | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Net interest income                                                  |  |                                          | 8,883     |                                         |   | 8,172     |  |      | 25,907    |   |   | 23,443    | 
|Provision for loan losses                                            |  |                                          | 2,410     |                                         |   | 550       |  |      | 5,045     |   |   | 1,368     | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Net interest income after provision for loan losses                  |  |                                          | 6,473     |                                         |   | 7,622     |  |      | 20,862    |   |   | 22,075    | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Non-interest income:                                                 |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Trust & farm management fees                                         |  |                                          | 296       |                                         |   | 309       |  |      | 1,004     |   |   | 1,120     | 
|Service charges on deposit accounts                                  |  |                                          | 1,050     |                                         |   | 1,174     |  |      | 3,004     |   |   | 3,376     | 
|Other service charges                                                |  |                                          | 495       |                                         |   | 563       |  |      | 1,448     |   |   | 1,587     | 
|Gain on sales of securities available-for-sale                       |  |                                          | 38        |                                         |   | 54        |  |      | 799       |   |   | 331       | 
|Brokerage fee income                                                 |  |                                          | 192       |                                         |   | 249       |  |      | 639       |   |   | 676       | 
|Mortgage banking income, net                                         |  |                                          | 449       |                                         |   | 243       |  |      | 1,325     |   |   | 879       | 
|Bank-owned life insurance income                                     |  |                                          | 235       |                                         |   | 227       |  |      | 708       |   |   | 648       | 
|Other operating income                                               |  |                                          | 17        |                                         |   | 32        |  |      | 165       |   |   | 138       | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Total non-interest income                                            |  |                                          | 2,772     |                                         |   | 2,851     |  |      | 9,092     |   |   | 8,755     | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Non-interest expense:                                                |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Salaries and employee benefits                                       |  |                                          | 4,821     |                                         |   | 4,459     |  |      | 13,514    |   |   | 13,082    | 
|Occupancy                                                            |  |                                          | 640       |                                         |   | 619       |  |      | 1,952     |   |   | 1,908     | 
|Equipment expense                                                    |  |                                          | 768       |                                         |   | 698       |  |      | 2,304     |   |   | 2,168     | 
|Federal insurance assessments                                        |  |                                          | 566       |                                         |   | 99        |  |      | 2,089     |   |   | 267       | 
|Intangible assets amortization                                       |  |                                          | 204       |                                         |   | 178       |  |      | 620       |   |   | 535       | 
|Data processing                                                      |  |                                          | 319       |                                         |   | 272       |  |      | 974       |   |   | 852       | 
|Advertising                                                          |  |                                          | 169       |                                         |   | 195       |  |      | 577       |   |   | 524       | 
|Other real estate expenses, net                                      |  |                                          | 312       |                                         |   | 29        |  |      | 821       |   |   | 151       | 
|Other operating expense                                              |  |                                          | 1,202     |                                         |   | 1,079     |  |      | 3,626     |   |   | 3,209     | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Total non-interest expense                                           |  |                                          | 9,001     |                                         |   | 7,628     |  |      | 26,477    |   |   | 22,696    | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Income before income taxes                                           |  |                                          | 244       |                                         |   | 2,845     |  |      | 3,477     |   |   | 8,134     | 
|Income tax expense                                                   |  |                                          | (516      | )                                       |   | 658       |  |      | (338      | ) |   | 1,836     | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Net income                                                           |  |                                          | 760       |                                         |   | 2,187     |  |      | 3,815     |   |   | 6,298     | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Preferred stock dividends                                            |  |                                          | 313       |                                         |   |          |  |      | 868       |   |   |          | 
|Accretion of preferred stock discount                                |  |                                          | 7         |                                         |   |          |  |      | 18        |   |   |          | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Net income available to common stockholders                          |  | $                                        | 440       |                                         | $ | 2,187     |  | $    | 2,929     |   | $ | 6,298     | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Per share information:                                               |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|BASIC net income per common share available to common stockholders   |  |                                          | 0.13      |                                         |   | 0.66      |  |      | 0.89      |   |   | 1.91      | 
|DILUTED net income per common share available to common stockholders |  |                                          | 0.13      |                                         |   | 0.66      |  |      | 0.89      |   |   | 1.90      | 
|                                                                     |  |                                          |           |                                         |   |           |  |      |           |   |   |           | 
|Basic weighted average shares outstanding                            |  |                                          | 3,302,172 |                                         |   | 3,295,200 |  |      | 3,300,148 |   |   | 3,298,408 | 
|Diluted weighted average shares outstanding                          |  |                                          | 3,302,812 |                                         |   | 3,305,195 |  |      | 3,300,688 |   |   | 3,309,560 | 

See accompanying notes to unaudited consolidated
financial statements

5

---



Schedule 3

|                                                            | 
|----------------------------------------------------------- | 
|PRINCETON NATIONAL BANCORP, INC. AND
 SUBSIDIARY           
|CONSOLIDATED STATEMENTS OF CHANGES IN
 STOCKHOLDERS EQUITY

(Unaudited)(dollars in thousands except per share data)


|                                                                                                   |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    |        |   |    |        |   |   |         |  
|-------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ----------- | - | ------------------- |  | ------------------------ | --- | ---------------- | - | ------------------------------------------------------------- | - | ------------- | ------ | ----- | -- | ------ | - | -- | ------ | - | - | ------- | -
|For
 the Nine Months EndedSeptember
 30, 2009                                                      |  | PreferredStock |        | CommonStock |   | CommonStockWarrants |  | AdditionalPaid-inCapital |     | RetainedEarnings |   | AccumulatedOtherComprehensiveIncome (Loss),net of
 tax effect |   | TreasuryStock |        | Total
|                                                                                                   |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    |        |   |    |        |   |   |         |  
|Balance, January
 1, 2009                                                                          |  | $              |       |             | $ | 22,391              |  | $                        |    |                  | $ | 18,420                                                        |   | $             | 54,329 |       | $  | 1,402  |   | ($ | 24,071 | ) | $ | 72,471  |  
|                                                                                                   |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    |        |   |    |        |   |   |         |  
|Net income                                                                                         |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               | 3,815  |       |    |        |   |    |        |   |   | 3,815   |  
|Issuance of
 25,083 shares of preferred
 stock and 155,025 common stock
 warrants, net of expenses |  |                | 24,933 |             |   |                     |  |                          | 150 |                  |   | (63                                                           | ) |               |        |       |    |        |   |    |        |   |   | 25,020  |  
|Dividends on
 preferred stock                                                                      |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               | (703   | )     |    |        |   |    |        |   |   | (703    | )
|Accretion on
 preferred stock discount                                                             |  |                | 18     |             |   |                     |  |                          |     |                  |   |                                                               |   |               | (18    | )     |    |        |   |    |        |   |   |        |  
|Sale of 5,522
 shares
 of treasury common stock                                                    |  |                |        |             |   |                     |  |                          |     |                  |   | (11                                                           | ) |               |        |       |    |        |   |    | 94     |   |   | 83      |  
|Dividends on
 common stock
 ($.56 per share)                                                       |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               | (1,848 | )     |    |        |   |    |        |   |   | (1,848  | )
|Stock option
 compensation expense                                                                 |  |                |        |             |   |                     |  |                          |     |                  |   | 71                                                            |   |               |        |       |    |        |   |    |        |   |   | 71      |  
|Other
 comprehensive income,
 net of $2,595 tax effect                                             |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    | 4,103  |   |    |        |   |   | 4,103   |  
|                                                                                                   |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    |        |   |    |        |   |   |         |  
|Balance,
 September 30, 2009                                                                       |  | $              | 24,951 |             | $ | 22,391              |  | $                        | 150 |                  | $ | 18,417                                                        |   | $             | 55,575 |       | $  | 5,505  |   | ($ | 23,977 | ) | $ | 103,012 |  
|                                                                                                   |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    |        |   |    |        |   |   |         |  
|For the Nine Months
 Ended
 September 30, 2008                                                     |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    |        |   |    |        |   |   |         |  
|                                                                                                   |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    |        |   |    |        |   |   |         |  
|Balance, January
 1, 2008                                                                          |  | $              |       |             | $ | 22,391              |  | $                        |    |                  | $ | 18,275                                                        |   | $             | 51,279 |       | $  | 344    |   | ($ | 23,682 | ) | $ | 68,607  |  
|                                                                                                   |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    |        |   |    |        |   |   |         |  
|Net income                                                                                         |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               | 6,298  |       |    |        |   |    |        |   |   | 6,298   |  
|Purchase of
 20,000 shares
 of treasury common stock                                               |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    |        |   |    | (554   | ) |   | (554    | )
|Sale of 3,722
 shares
 of treasury common stock                                                    |  |                |        |             |   |                     |  |                          |     |                  |   | 33                                                            |   |               |        |       |    |        |   |    | 64     |   |   | 97      |  
|Exercise of stock
 options and
 re-issuance of treasury common
 stock (4,500 shares)               |  |                |        |             |   |                     |  |                          |     |                  |   | 20                                                            |   |               |        |       |    |        |   |    | 77     |   |   | 97      |  
|Dividends on
 common stock
 ($.84 per share)                                                       |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               | (2,773 | )     |    |        |   |    |        |   |   | (2,773  | )
|Stock option
 compensation expense                                                                 |  |                |        |             |   |                     |  |                          |     |                  |   | 63                                                            |   |               |        |       |    |        |   |    |        |   |   | 63      |  
|Adjustment to
 apply EITF 06-4                                                                     |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               | (579   | )     |    |        |   |    |        |   |   | (579    | )
|Other
 comprehensive loss,
 net of $1,249 tax effect                                               |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    | (1,975 | ) |    |        |   |   | (1,975  | )
|                                                                                                   |  |                |        |             |   |                     |  |                          |     |                  |   |                                                               |   |               |        |       |    |        |   |    |        |   |   |         |  
|Balance,
 September 30, 2008                                                                       |  | $              |       |             | $ | 22,391              |  | $                        |    |                  | $ | 18,391                                                        |   | $             | 54,225 |       | ($ | 1,631  | ) | ($ | 24,095 | ) | $ | 69,281  |  

See accompanying notes to unaudited consolidated financial
statements

6

---



Schedule 4

| |                                                 | 
| | ----------------------------------------------- | 
| | PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY | 
| | CONSOLIDATED STATEMENTS OF CASH FLOWS           | 
| | (Unaudited)                                     | 
| | (dollars in thousands)                          | 

|                                                                                      |  |                                         |          |      |   |         |  
|------------------------------------------------------------------------------------- |  | --------------------------------------- | -------- | ---- | - | ------- | -
|                                                                                      |  | For the Nine Months Ended
 September 30 |         
|                                                                                      |  | 2009                                    |          | 2008 |  
|Operating activities:                                                                 |  |                                         |          |      |   |         |  
|Net income                                                                            |  | $                                       | 3,815    |      | $ | 6,298   |  
|Adjustments to reconcile net income to net
 cash provided by operating activities:    |  |                                         |          |      |   |         |  
|Depreciation                                                                          |  |                                         | 1,644    |      |   | 1,664   |  
|Provision for loan losses                                                             |  |                                         | 5,045    |      |   | 1,368   |  
|Amortization of intangible assets and other
 purchase accounting adjustments, net     |  |                                         | 622      |      |   | 535     |  
|Amortization (accretion) of premiums and
 discounts on investment securities, net     |  |                                         | 1,029    |      |   | 5       |  
|Gain on sales of securities
 available-for-sale, net                                  |  |                                         | (799     | )    |   | (331    | )
|Impairment of mortgage servicing rights                                               |  |                                         | 556      |      |   | 0       |  
|Compensation expense for vested stock
 options                                        |  |                                         | 71       |      |   | 63      |  
|Gain on sales of other real estate owned,
 net                                        |  |                                         | 52       |      |   | 2       |  
|Loans originated for sale                                                             |  |                                         | (113,871 | )    |   | (69,867 | )
|Proceeds from sales of loans originated for
 sale                                     |  |                                         | 110,542  |      |   | 68,141  |  
|Decrease in accrued interest payable                                                  |  |                                         | (515     | )    |   | (673    | )
|Decrease in accrued interest receivable                                               |  |                                         | 150      |      |   | 623     |  
|(Increase) decrease in other assets                                                   |  |                                         | (736     | )    |   | 142     |  
|Decrease in other liabilities                                                         |  |                                         | (1,670   | )    |   | (1,168  | )
|                                                                                      |  |                                         |          |      |   |         |  
|Net cash provided by operating activities                                             |  |                                         | 5,935    |      |   | 6,802   |  
|                                                                                      |  |                                         |          |      |   |         |  
|Investing activities:                                                                 |  |                                         |          |      |   |         |  
|Proceeds from sales of investment
 securities available-for-sale                      |  |                                         | 44,564   |      |   | 16,170  |  
|Proceeds from maturities of investment
 securities available-for-sale                 |  |                                         | 52,043   |      |   | 45,326  |  
|Purchase of investment securities available-for-sale                                  |  |                                         | (174,181 | )    |   | (77,409 | )
|Proceeds from maturities of investment
 securities held-to-maturity                   |  |                                         | 1,300    |      |   | 1,615   |  
|Purchase of investment securities
 held-to-maturity                                   |  |                                         | (2,105   | )    |   | (1,769  | )
|Proceeds from sales of other real estate
 owned                                       |  |                                         | 398      |      |   | 798     |  
|Net decrease (increase) in loans                                                      |  |                                         | 2,193    |      |   | (41,367 | )
|Purchases of premises and equipment                                                   |  |                                         | (910     | )    |   | (1,153  | )
|                                                                                      |  |                                         |          |      |   |         |  
|Net cash used in investing activities                                                 |  |                                         | (76,698  | )    |   | (57,789 | )
|                                                                                      |  |                                         |          |      |   |         |  
|Financing activities:                                                                 |  |                                         |          |      |   |         |  
|Net increase in deposits                                                              |  |                                         | 102,681  |      |   | 46,039  |  
|Net decrease in borrowings                                                            |  |                                         | (9,709   | )    |   | (1,334  | )
|Dividends on common stock                                                             |  |                                         | (1,848   | )    |   | (2,773  | )
|Dividends on preferred stock                                                          |  |                                         | (703     | )    |   |        |  
|Purchases of treasury common stock                                                    |  |                                         |         |      |   | (554    | )
|Sales of treasury common stock                                                        |  |                                         | 83       |      |   | 97      |  
|Exercise of stock options and issuance of
 treasury stock                             |  |                                         |         |      |   | 97      |  
|Proceeds from issuance of preferred stock
 and common stock warrants, net of expenses |  |                                         | 25,020   |      |   |        |  
|                                                                                      |  |                                         |          |      |   |         |  
|Net cash provided by financing activities                                             |  |                                         | 115,524  |      |   | 41,572  |  
|                                                                                      |  |                                         |          |      |   |         |  
|Increase (decrease) in cash and cash
 equivalents                                     |  |                                         | 44,761   |      |   | (9,415  | )
|Cash and cash equivalents at beginning of
 period                                     |  |                                         | 20,261   |      |   | 27,604  |  
|                                                                                      |  |                                         |          |      |   |         |  
|Cash and cash equivalents at September 30                                             |  | $                                       | 65,022   |      | $ | 18,189  |  
|                                                                                      |  |                                         |          |      |   |         |  
|                                                                                      |  |                                         |          |      |   |         |  
|Supplemental disclosures of cash flow
 information:                                   |  |                                         |          |      |   |         |  
|Cash paid during the period for:                                                      |  |                                         |          |      |   |         |  
|Interest                                                                              |  | $                                       | 17,648   |      | $ | 21,581  |  
|Income taxes                                                                          |  | $                                       | 2,040    |      | $ | 2,368   |  
|                                                                                      |  |                                         |          |      |   |         |  
|Supplemental disclosures of non-cash flow
 activities:                                |  |                                         |          |      |   |         |  
|Loans transferred to other real estate
 owned                                         |  | $                                       | 14,145   |      | $ | 1,297   |  

See accompanying notes to unaudited
consolidated financial statements

7

---



Schedule 5

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARYNotes to Consolidated Financial Statements 
(Unaudited)

The
accompanying unaudited condensed consolidated financial statements reflect all
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the results of the three-month and nine-month periods ended
September 30, 2009 and 2008, and all such adjustments are of a normal recurring
nature. The 2008 year-end consolidated
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.

The
unaudited consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information
required by accounting principles generally accepted in the United States of
America for complete financial statements and related footnote
disclosures. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered for a
fair presentation of the results for the interim period have been
included. For further information,
refer to the consolidated financial statements and notes included in the
Registrants 2008 Annual Report on Form 10-K.
Results of operations for interim periods are not necessarily indicative
of the results that may be expected for the year. Certain amounts in the 2008 consolidated financial statements
have been reclassified to conform to the 2009 presentation.

(1) CAPITAL PURCHASE PROGRAM

On
January 23, 2009, the Corporation received $25,083,000 of equity capital by
issuing to the United States Department of Treasury 25,083 shares of the
Corporations 5.00% Series B Fixed Rate Cumulative Perpetual Preferred Stock,
no par value, with a liquidation preference of $1,000 per share and a ten-year
warrant to purchase up to 155,025 shares of the Corporations common stock, par
value $0.01 per share, at an exercise price of $24.27 per share. The proceeds received were allocated to the
preferred stock and common stock warrants based on their relative fair
values. The resulting discount on the
preferred stock is amortized against retained earnings and is reflected in the
Corporations consolidated statement of income as Preferred shares dividends,
resulting in additional dilution to the Corporations earnings per common
share. The warrants are immediately
exercisable, in whole or in part, over a term of 10 years. The warrants were included in the Corporations
diluted average common shares outstanding (subject to anti-dilution). Both the preferred securities and warrants
were accounted for as additions to the Corporations regulatory Tier 1 and
total capital.

The
Series B Preferred stock is not mandatorily redeemable and will pay cumulative
dividends at a rate of 5% per year for the first five years and 9% per year
thereafter. Any redemption requires
Federal Reserve approval. The Series B
Perpetual Preferred stock ranks senior to the Corporations existing authorized
Series A Junior Participating Preferred stock.

A
company that participates must adopt certain standards for executive
compensation, including (a) prohibiting golden parachute payments as defined
in the Emergency Economic Stabilization Act of 2008 (EESA) to senior Executive
Officers; (b) requiring recovery of any compensation paid to senior Executive
Officers based on criteria that is later proven to be materially inaccurate;
(c) prohibiting incentive compensation that encourages unnecessary and
excessive risks that threaten the value of the financial institution; and (d)
accepting restrictions on the payment of dividends and the repurchase of common
stock.

8

---



(2)
EARNINGS PER SHARE CALCULATION

The
following table sets forth the computation of basic and diluted earnings per
share for the periods indicated (in thousands, except share data):

|                                                                   |  |                                   |           |                                  |   |           |  |      |           |  |   |           | 
|------------------------------------------------------------------ |  | --------------------------------- | --------- | -------------------------------- | - | --------- |  | ---- | --------- |  | - | --------- | 
|                                                                   |  | Three Months Ended
 September 30, |           | Nine Months Ended
 September 30, |  
|                                                                   |  | 2009                              |           | 2008                             |   | 2009      |  | 2008 |          
|Numerator:                                                         |  |                                   |           |                                  |   |           |  |      |           |  |   |           | 
|Net income available to common stockholders                        |  | $                                 | 440       |                                  | $ | 2,187     |  | $    | 2,929     |  | $ | 6,298     | 
|                                                                   |  |                                   |           |                                  |   |           |  |      |           |  |   |           | 
|Denominator:                                                       |  |                                   |           |                                  |   |           |  |      |           |  |   |           | 
|Basic earnings per share-weighted average common shares            |  |                                   | 3,302,172 |                                  |   | 3,295,200 |  |      | 3,300,148 |  |   | 3,298,408 | 
|                                                                   |  |                                   |           |                                  |   |           |  |      |           |  |   |           | 
|Effect of dilutive securities-stock options                        |  |                                   | 640       |                                  |   | 9,995     |  |      | 540       |  |   | 11,152    | 
|                                                                   |  |                                   |           |                                  |   |           |  |      |           |  |   |           | 
|Diluted earnings per share-adjusted weighted average common shares |  |                                   | 3,302,812 |                                  |   | 3,305,195 |  |      | 3,300,688 |  |   | 3,309,560 | 
|                                                                   |  |                                   |           |                                  |   |           |  |      |           |  |   |           | 
|Net income per share
 available to common stockholders:            |  |                                   |           |                                  |   |           |  |      |           |  |   |           | 
|                                                                   |  |                                   |           |                                  |   |           |  |      |           |  |   |           | 
|Basic                                                              |  | $                                 | 0.13      |                                  | $ | 0.66      |  | $    | 0.89      |  | $ | 1.91      | 
|Diluted                                                            |  | $                                 | 0.13      |                                  | $ | 0.66      |  | $    | 0.89      |  | $ | 1.90      | 

The
following shares were not considered in computing diluted earnings per share
for the three-month and nine-month periods ended September 30, 2009 and 2008
because they were anti-dilutive:

| |                                                                                 |  |                                   |         |                                  |  |         |  |      |         |  |  |         | 
| | ------------------------------------------------------------------------------- |  | --------------------------------- | ------- | -------------------------------- |  | ------- |  | ---- | ------- |  |  | ------- | 
| |                                                                                 |  | Three Months Ended
 September 30, |         | Nine Months Ended
 September 30, | 
| |                                                                                 |  | 2009                              |         | 2008                             |  | 2009    |  | 2008 |        
| | Stock options to purchase shares of common stock                                |  |                                   | 448,061 |                                  |  | 279,816 |  |      | 456,627 |  |  | 279,816 | 
| |                                                                                 |  |                                   |         |                                  |  |         |  |      |         |  |  |         | 
| | Average dilutive potential common shares associated with common stock
 warrants |  |                                   | 155,025 |                                  |  |        |  |      | 155,025 |  |  |        | 

(3) GOODWILL
AND INTANGIBLE ASSETS

The
balance of goodwill, net of accumulated amortization, totaled $24,521,000 at
September 30, 2009 and December 31, 2008.
The balance of intangible assets, net of accumulated amortization,
totaled $3,560,000 and $4,207,000 at September 30, 2009 and December 31, 2008,
respectively.

The
Corporation had a goodwill impairment study performed as of March 31, 2009 and
December 31, 2008. If the implied fair
value of goodwill is lower than its carrying amount, goodwill impairment is indicated
and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are
not recognized in the financial statements.
In the six-month period since the last impairment test, the Corporation
has reported net income and the stock price has improved. Therefore, there were no impairment
indicators which warranted a third party study of goodwill impairment during
the third quarter. Accordingly, there
was no impairment deemed necessary as of September 30, 2009.

9

---



The
following table summarizes the Corporations intangible assets, which are
subject to amortization, as of September 30, 2009 and December 31, 2008:

|                        |  |                        |       |                           |   |                        |   |                           |       |  |   |        |  
|----------------------- |  | ---------------------- | ----- | ------------------------- | - | ---------------------- | - | ------------------------- | ----- |  | - | ------ | -
|(in thousands)          |  |                        |       |                           |  
|                        |  | September 30, 2009     |       | December 31, 2008         |  
|                        |  | Gross Carrying
 Amount |       | Accumulated
 Amortization |   | Gross Carrying
 Amount |   | Accumulated
 Amortization |      
|                       
|Core deposit intangible |  | $                      | 9,004 |                           | $ | (5,504                 | ) | $                         | 9,004 |  | $ | (4,869 | )
|Other intangible assets |  |                        | 234   |                           |   | (174                   | ) |                           | 234   |  |   | (162   | )
|Total                   |  | $                      | 9,238 |                           | $ | (5,678                 | ) | $                         | 9,238 |  | $ | (5,031 | )

Amortization
expense of all intangible assets totaled $622,000 for the nine months ended
September 30, 2009 and $535,000 for the nine months ended September 30, 2008,
respectively. The amortization expense
of these intangible assets will be approximately $204,000 for the remaining
quarter of 2009.

(4) ORIGINATED MORTGAGE SERVICING RIGHTS

The
Corporation has originated mortgage servicing rights which are included in
other assets on the consolidated balance sheets. Mortgage servicing rights are amortized in proportion to, and
over the period of, estimated net servicing income on a basis similar to the
interest method using an accelerated amortization method and are subject to
periodic impairment testing. Changes in
the carrying value of capitalized mortgage servicing rights are summarized as
follows:

|                                 |  |   |       |  
|-------------------------------- |  | - | ----- | -
|(in thousands)                   |  |   |       |  
|                                 |  |   |       |  
|Balance, January 1, 2009         |  | $ | 2,936 |  
|Servicing rights capitalized     |  |   | 961   |  
|Amortization of servicing rights |  |   | (520  | )
|Impairment of servicing rights   |  |   | (556  | )
|Balance, September 30,
 2009     |  | $ | 2,821 |  

Activity
in the valuation allowance for mortgage servicing rights was as follows:

|                             |  |   |     | 
|---------------------------- |  | - | --- | 
|(in thousands)               |  |   |     | 
|                             |  |   |     | 
|Balance, January 1, 2009     |  | $ |    | 
|Additions                    |  |   | 556 | 
|Reductions                   |  |   |    | 
|Direct write-downs           |  |   |    | 
|Balance, September 30,
 2009 |  | $ | 556 | 

The
Corporation services loans for others with unpaid principal balances at
September 30, 2009 and December 31, 2008 of approximately $351,894,000, and
$304,551,000, respectively.

10

---



The
following table shows the future estimated amortization expense for mortgage
servicing rights based on existing balances as of September 30, 2009. The
Corporations actual amortization expense in any given period may be
significantly different from the estimated amounts displayed depending on the
amount of additional mortgage servicing rights, changes in mortgage interest
rates, estimated prepayment speeds, and market conditions.

Estimated Amortization Expense:

|                                              |  |                       |       | 
|--------------------------------------------- |  | --------------------- | ----- | 
|                                              |  | Amount (in thousands) |      
|For the three months ended
 December 31, 2009 |  | $                     | 79    | 
|For the year ended
 December 31, 2010         |  |                       | 311   | 
|For the year ended
 December 31, 2011         |  |                       | 291   | 
|For the year ended
 December 31, 2012         |  |                       | 273   | 
|For the year ended
 December 31, 2013         |  |                       | 257   | 
|For the year ended December
 31, 2014         |  |                       | 241   | 
|Thereafter                                    |  |                       | 1,369 | 

(5) ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)

Other
comprehensive loss components and the related tax benefit for the nine months
ended September 30, 2009 and 2008 were as follows:

|                                                                         |  |      |       |      |   |        |  
|------------------------------------------------------------------------ |  | ---- | ----- | ---- | - | ------ | -
|(in thousands)                                                           |  |      |       |      |   |        |  
|                                                                         |  |      |       |      |   |        |  
|                                                                         |  | 2009 |       | 2008 |  
|                                                                         |  |      |       |      |  
|Net unrealized gains
 (losses) on securities available-for-sale          |  | $    | 7,497 |      | $ | (2,905 | )
|Less: Reclassification
 adjustment for realized gains included in income |  |      | 799   |      |   | 331    |  
|                                                                         |  |      | 6,698 |      |   | (3,236 | )
|                                                                         |  |      |       |      |   |        |  
|Amortization of transition
 obligation of post retirement health care    |  |      | 0     |      |   | 12     |  
|                                                                         |  |      |       |      |   |        |  
|Other comprehensive income
 (loss), before tax effect                    |  |      | 6,698 |      |   | (3,224 | )
|                                                                         |  |      |       |      |   |        |  
|Less: Tax expense
 (benefit)                                             |  |      | 2,595 |      |   | (1,249 | )
|                                                                         |  |      |       |      |   |        |  
|Other comprehensive income
 (loss)                                       |  | $    | 4,103 |      | $ | (1,975 | )

The
components of accumulated other comprehensive income (loss), included in
stockholders equity at September 30, 2009 and 2008 are as follows:

|                                                                |  |      |       |      |   |        |  
|--------------------------------------------------------------- |  | ---- | ----- | ---- | - | ------ | -
|(in thousands)                                                  |  |      |       |      |   |        |  
|                                                                |  |      |       |      |   |        |  
|                                                                |  | 2009 |       | 2008 |  
|                                                                |  |      |       |      |  
|Net unrealized gains
 (losses) on securities available-for-sale |  | $    | 9,517 |      | $ | (2,110 | )
|Net unrealized benefit
 obligations                             |  |      | (531  | )    |   | (552   | )
|                                                                |  |      | 8,986 |      |   | (2,662 | )
|                                                                |  |      |       |      |   |        |  
|Less: Tax expense (benefit)                                     |  |      | 3,481 |      |   | (1,031 | )
|                                                                |  |      |       |      |   |        |  
|Net of-tax amount                                              |  | $    | 5,505 |      | $ | (1,631 | )

11

---



(6) FEDERAL HOME LOAN BANK STOCK

The
Corporation has Federal Home Loan Bank stock totaling $2,373,000 at September
30, 2009 and December 31, 2008. During the third quarter of 2007, the Federal
Home Loan Bank of Chicago received a Cease and Desist Order from their
regulator, the Federal Housing Finance Board. The Federal Home Loan Bank will
continue to provide liquidity and funding through advances, however, the order
prohibits capital stock repurchases and redemptions until a time to be
determined by the Federal Housing Finance Board and requires their approval for
dividends. With regard to dividends, the Federal Home Loan Bank will continue
to assess its dividend capacity each quarter and make appropriate request for
approval. There were no dividends paid by the Federal Home Loan Bank of Chicago
during the first nine months of 2009 or during 2008. Management performed an
analysis and deemed the investment in Federal Home Loan Bank stock was not
other than temporarily impaired as of September 30, 2009 or December 31, 2008.

(7) INVESTMENT SECURITIES

The
amortized cost, gross unrealized gains, gross unrealized losses, and estimated
fair value of available-for-sale and held-to-maturity securities by major
security type at September 30, 2009 and December 31, 2008 were as follows:

|                                    |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|----------------------------------- |  | --------------- | ------- | ------------------------ | - | ------------------------- |  | ---------------------- | ---- | - | - | ------- | 
|(in thousands)                      |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|                                    |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|September 30, 2009                  |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|                                    |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|                                    |  | Amortized
 Cost |         | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Estimated
 Fair
 Value |     
|Available-for-sale:                 |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|United States government agencies   |  | $               | 108,685 |                          | $ | 2,740                     |  | $                      | (33  | ) | $ | 111,392 | 
|State and municipal                 |  |                 | 117,367 |                          |   | 5,310                     |  |                        | (165 | ) |   | 122,512 | 
|Collateralized mortgage obligations |  |                 | 85,409  |                          |   | 1,692                     |  |                        | (27  | ) |   | 87,074  | 
|                                    |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|Total                               |  |                 | 311,461 |                          |   | 9,742                     |  |                        | (225 | ) |   | 320,978 | 
|Held-to-maturity:                   |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|State and municipal                 |  |                 | 14,984  |                          |   | 592                       |  |                        | (12  | ) |   | 15,564  | 
|                                    |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|Total                               |  | $               | 326,445 |                          | $ | 10,334                    |  | $                      | (237 | ) | $ | 336,542 | 

|                                    |  |                 |         |                          |   |                           |  |                        |        |   |   |         | 
|----------------------------------- |  | --------------- | ------- | ------------------------ | - | ------------------------- |  | ---------------------- | ------ | - | - | ------- | 
|December
 31, 2008                  |  |                 |         |                          |   |                           |  |                        |        |   |   |         | 
|                                    |  |                 |         |                          |   |                           |  |                        |        |   |   |         | 
|                                    |  | Amortized
 Cost |         | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Estimated
 Fair
 Value |       
|Available-for-sale:                 |  |                 |         |                          |   |                           |  |                        |        |   |   |         | 
|United States government agencies   |  | $               | 89,883  |                          | $ | 2,344                     |  | $                      | (29    | ) | $ | 92,198  | 
|State and municipal                 |  |                 | 89,776  |                          |   | 1,336                     |  |                        | (1,384 | ) |   | 89,728  | 
|Collateralized mortgage obligations |  |                 | 54,405  |                          |   | 579                       |  |                        | (27    | ) |   | 54,957  | 
|                                    |  |                 |         |                          |   |                           |  |                        |        |   |   |         | 
|Total                               |  |                 | 234,064 |                          |   | 4,259                     |  |                        | (1,440 | ) |   | 236,883 | 
|                                    |  |                 |         |                          |   |                           |  |                        |        |   |   |         | 
|Held-to-maturity:                   |  |                 |         |                          |   |                           |  |                        |        |   |   |         | 
|State and municipal                 |  |                 | 14,232  |                          |   | 294                       |  |                        | (65    | ) |   | 14,461  | 
|Total                               |  | $               | 248,296 |                          | $ | 4,553                     |  | $                      | (1,505 | ) | $ | 251,344 | 

12

---



Maturities
of investment securities classified as available-for-sale and held-to-maturity
were as follows at September 30, 2009:

|                                       |  |                 |         |                        |   |         | 
|-------------------------------------- |  | --------------- | ------- | ---------------------- | - | ------- | 
|(in thousands)                         |  |                 |         |                        |   |         | 
|                                       |  |                 |         |                        |   |         | 
|                                       |  | Amortized
 Cost |         | Estimated
 Fair
 Value |  
|Available-for-sale:                    |  |                 |         |                        |   |         | 
|Due in one year or less                |  | $               | 1,377   |                        | $ | 1,386   | 
|Due after one year through five years  |  |                 | 8,430   |                        |   | 8,743   | 
|Due after five years through ten years |  |                 | 67,410  |                        |   | 70,239  | 
|Due after ten years                    |  |                 | 76,209  |                        |   | 78,787  | 
|                                       |  |                 | 153,426 |                        |   | 159,155 | 
|                                       |  |                 |         |                        |   |         | 
|Mortgage-backed securities             |  |                 | 72,626  |                        |   | 74,749  | 
|Collateralized mortgage obligations    |  |                 | 85,409  |                        |   | 87,074  | 
|                                       |  | $               | 311,461 |                        | $ | 320,978 | 
|                                       |  |                 |         |                        |   |         | 
|Held-to-maturity:                      |  |                 |         |                        |   |         | 
|Due in one year or less                |  | $               | 3,603   |                        | $ | 3,619   | 
|Due after one year through five years  |  |                 | 7,224   |                        |   | 7,599   | 
|Due after five years through ten years |  |                 | 3,680   |                        |   | 3,866   | 
|Due after ten years                    |  |                 | 477     |                        |   | 480     | 
|                                       |  | $               | 14,984  |                        | $ | 15,564  | 

Proceeds
from sales of investment securities available-for-sale during the first nine
months of 2009 were $44,564 and $16,170 during the first nine months of 2008.
Proceeds from sales of investment securities available-for-sale during the year
ended December 31, 2008 were $38,499. Gross gains of $1,113 and gross losses of
$314 were realized on those sales in the first nine months of 2009, and gross
gains of $357 and gross losses of $26 were realized on those sales in the first
nine months of 2008. For the year ended December 31, 2008 there were gross
gains of $431 and gross losses of $26 realized on those sales. There were no
sales of investment securities classified as held-to-maturity during the nine
months ended September 30, 2009 or September 30, 2008, or for the year ended
December 31, 2008.

13

---



Securities with unrealized losses at September 30, 2009 and December 31, 2008
not recognized in income are as follows:

|                                     |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|------------------------------------ |  | ------------------- | ------ | ----------------------- | - | ----------- | - | ----------------------- | ------ | ----------- | - | ----------------------- | - | - | ------ |  | - | ------ | -
|(in thousands)                       |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|                                     |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|September 30, 2009                   |  | Less than 12 Months |        | 12 Months or More       |   | Total       |  
|                                     |  | Fair
 Value         |        | Gross
 Unrealized
 Loss |   | Fair
 Value |   | Gross
 Unrealized
 Loss |        | Fair
 Value |   | Gross
 Unrealized
 Loss |  
|                                     |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|United
 States Government Agencies   |  | $                   | 5,549  |                         | $ | (33         | ) | $                       | -0-    |             | $ | -0-                     |   | $ | 5,549  |  | $ | (33    | )
|State
 and Municipal                 |  |                     | 12,830 |                         |   | (177        | ) |                         | -0-    |             |   | -0-                     |   |   | 12,830 |  |   | (177   | )
|Collateralized
 mortgage obligations |  |                     | 5,081  |                         |   | (27         | ) |                         | -0-    |             |   | -0-                     |   |   | 5,081  |  |   | (27    | )
|                                     |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|Total
 temporarily impaired          |  | $                   | 23,460 |                         | $ | (237        | ) | $                       | -0-    |             | $ | -0-                     |   | $ | 23,460 |  | $ | (237   | )
|                                     |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|December 31, 2008                    |  | Less than 12 Months |        | 12 Months or More       |   | Total       |  
|                                     |  | Fair
 Value         |        | Gross
 Unrealized
 Loss |   | Fair
 Value |   | Gross
 Unrealized
 Loss |        | Fair
 Value |   | Gross
 Unrealized
 Loss |  
|                                     |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|United
 States Government Agencies   |  | $                   | 1,569  |                         | $ | (19         | ) | $                       | 461    |             | $ | (10                     | ) | $ | 2,030  |  | $ | (29    | )
|State
 and Municipal                 |  |                     | 17,913 |                         |   | (679        | ) |                         | 22,082 |             |   | (770                    | ) |   | 39,995 |  |   | (1,449 | )
|Collateralized
 mortgage obligations |  |                     | 3,310  |                         |   | (12         | ) |                         | 3,308  |             |   | (15                     | ) |   | 6,618  |  |   | (27    | )
|                                     |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|Total
 temporarily impaired          |  | $                   | 22,792 |                         | $ | (710        | ) | $                       | 25,851 |             | $ | (795                    | ) | $ | 48,643 |  | $ | (1,505 | )

There
are 68 securities in an unrealized loss position in the investment portfolio at
September 30, 2009, all due to interest rate changes and not credit events.
These unrealized losses are considered temporary and, therefore, have not been
recognized into income, because the issuers are of high credit quality and
management has the ability and intent to hold for the foreseeable future. The
fair value is expected to recover as the investments approach their maturity
date or there is a downward shift in interest rates.

The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes was $316,231 at September 30, 2009 and $234,525 at
December 31, 2008.

(8) FAIR VALUE OF ASSETS AND LIABILITIES

Effective
January 1, 2008, the Corporation adopted Financial Accounting Standards Board
Accounting Standards Codification 820 (ASC 820), Fair Value Measurements. ASC
820 defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. FAS 157 has been applied
prospectively as of the beginning of the period.

14

---



ASC
820 defines the fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.

In
accordance with ASC 820, the Corporation groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. These levels are:

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Valuations
 for assets and liabilities traded in active exchange markets, such as the New
 York Stock Exchange. Valuations are obtained from readily available pricing
 sources for market transactions involving identical assets or liabilities.                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Level 2 |  | Valuations
 for assets and liabilities traded in less active dealer or broker markets.
 Valuations are obtained from third party pricing services for identical or
 comparable assets or liabilities which use observable inputs other than Level
 1 prices, such as quoted prices for similar assets or liabilities; quoted
 prices in markets that are not active; or other inputs that are observable or
 can be corroborated by observable market data for substantially the full term
 of the assets and liabilities.
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Level 3 |  | Unobservable
 inputs that are supported by little or no market activity and that are
 significant to the fair value of the assets or liabilities.                                                                                                                                                                                                                                                                                                                                                                         

Following
is a description of the valuation methodologies used for instruments measured
at fair value on a recurring basis and recognized in the accompanying balance
sheet.

Available-for-Sale Securities

The
fair value of available-for-sale securities are determined by various valuation
methodologies. Where quoted market prices are available in an active market,
securities are classified within Level 1. The Corporation has no securities
classified within Level 1. If quoted market prices are not available, then fair
values are estimated by using pricing models or quoted prices of securities
with similar characteristics. Level 2 securities include U.S. Treasury
securities, obligations of U.S. government corporations and agencies,
obligations of states and political subdivisions, mortgage-backed securities
and collateralized mortgage obligations. In certain cases where Level 1 or
Level 2 inputs are not available, securities are classified within Level 3 of
the hierarchy. The Corporation has no securities classified within Level 3.

The
following table presents the Corporations assets that are measured at fair
value on a recurring basis and the level within the ASC 820 hierarchy in which
the fair value measurements fall as of September 30, 2009 and December 31, 2008
(in thousands):

15

---



September 30,
2009

|                               |  |            |         |                                                                      |                               |                                                  |  |                                              |         |  |   |   | 
|------------------------------ |  | ---------- | ------- | -------------------------------------------------------------------- | ----------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ------- |  | - | - | 
|                               |  |            |         |                                                                      | Fair Value Measurements Using |                                                 
|                               |  | Fair Value |         | Quoted Prices in 
 Active Markets for 
 Identical Assets 
 (Level 1) |                               | Significant Other 
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |        
|                               |  |            |         |                                                                      |                               |                                                  |  |                                              |         |  |   |   | 
|Available-for-sale
 securities |  | $          | 320,978 |                                                                      | $                             | 0                                                |  | $                                            | 320,978 |  | $ | 0 | 

December 31,
2008

|                               |  |            |         |                                                                   |                               |                                                 |  |                                              |         |  |   |   | 
|------------------------------ |  | ---------- | ------- | ----------------------------------------------------------------- | ----------------------------- | ----------------------------------------------- |  | -------------------------------------------- | ------- |  | - | - | 
|                               |  |            |         |                                                                   | Fair Value Measurements Using |                                                
|                               |  | Fair Value |         | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                               | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |        
|                               |  |            |         |                                                                   |                               |                                                 |  |                                              |         |  |   |   | 
|Available-for-sale
 securities |  | $          | 236,883 |                                                                   | $                             | 0                                               |  | $                                            | 236,883 |  | $ | 0 | 

Following
is a description of the valuation methodologies used for assets and liabilities
measured at fair value on a non-recurring basis and recognized in the
accompanying balance sheets, as well as the general classification of such
assets and liabilities pursuant to the valuation hierarchy.

Impaired Loans

Loans for
which it is probable that the Corporation will not collect all principal and
interest due according to contractual terms are measured for impairment in
accordance with the provisions of ASC 310, Accounting
by Creditors for Impairment of a Loan.
Allowable methods for estimating fair value include using the fair value of the
collateral for collateral dependent loans or, where a loan is determined not to
be collateral dependent, using the discounted cash flow method.

If the
impaired loan is identified as collateral dependent, then the fair value method
of measuring the amount of impairment is utilized. This method requires
obtaining a current independent appraisal of the collateral and applying a
discount factor to the value. If the impaired loan is determined not to be
collateral dependent, then the discounted cash flow method is used. This method
requires the impaired loan to be recorded at the present value of expected
future cash flows discounted at the loans effective interest rate. The
effective interest rate of a loan is the contractual interest rate adjusted for
any net deferred loan fees or costs, premiums or discount existing at
origination or acquisition of the loan. Impaired loans are classified within
Level 3 of the fair value hierarchy.

16

---



Mortgage Servicing
Rights

The fair
value used to determine the valuation allowance is estimated using discounted
cash flow models. Due to the nature of the valuation inputs, mortgage servicing
rights are classified within Level 3 of the hierarchy.

Other Real Estate
Owned

Other real
estate owned acquired through loan foreclosure is initially recorded at fair
value less costs to sell when acquired, establishing a new cost basis. The
adjustment at the time of foreclosure is recorded through the allowance for
loan losses. Due to the subjective nature of establishing the fair value when
the asset is acquired, the actual fair value of the other real estate owned or
foreclosed asset could differ from the original estimate. If it is determined
the fair value declines subsequent to foreclosure, a valuation allowance is
recorded through non-interest expense. Operating costs associated with the
assets after acquisition are also recorded as non-interest expense. Gains and
losses on the disposition of other real estate owned and foreclosed assets are
netted and posted to other non-interest expense. Other real estate owned
measured at fair value on a non-recurring basis at September 30, 2009 amounted
to $14.2 million.

The
following table presents the fair value measurement of assets and liabilities
measured at fair value on a nonrecurring basis and the level within the ASC 820
fair value hierarchy in which the fair value measurements fall at September 30,
2009 and December 31, 2008 (in thousands):

September 30,
2009

|                           |  |            |        |                                                                   |                               |                                                 |  |                                              |   |  |   |        | 
|-------------------------- |  | ---------- | ------ | ----------------------------------------------------------------- | ----------------------------- | ----------------------------------------------- |  | -------------------------------------------- | - |  | - | ------ | 
|                           |  |            |        |                                                                   | Fair Value Measurements Using |                                                
|                           |  | Fair Value |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                               | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |  
|                           |  |            |        |                                                                   |                               |                                                 |  |                                              |   |  |   |        | 
|Impaired
 loans            |  | $          | 3,650  |                                                                   |                               | 0                                               |  |                                              | 0 |  | $ | 3,650  | 
|Mortgage
 servicing rights |  |            | 2,821  |                                                                   |                               | 0                                               |  |                                              | 0 |  |   | 2,821  | 
|Other real
 estate owned   |  |            | 14,057 |                                                                   |                               | 0                                               |  |                                              | 0 |  |   | 14,057 | 

December 31,
2008

|                |  |            |       |                                                                   |                               |                                                 |  |                                              |   |  |   |       | 
|--------------- |  | ---------- | ----- | ----------------------------------------------------------------- | ----------------------------- | ----------------------------------------------- |  | -------------------------------------------- | - |  | - | ----- | 
|                |  |            |       |                                                                   | Fair Value Measurements Using |                                                
|                |  | Fair Value |       | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                               | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |  
|                |  |            |       |                                                                   |                               |                                                 |  |                                              |   |  |   |       | 
|Impaired
 loans |  | $          | 2,494 |                                                                   |                               | 0                                               |  |                                              | 0 |  | $ | 2,494 | 

17

---



ASC 825,
Disclosures about Fair Value of Financial Instruments, requires all entities
to disclose the estimated fair value of their financial instrument assets and
liabilities. For the Corporation, as for most financial institutions, the
majority of its assets and liabilities are considered financial instruments as
defined in ASC 825. Many of the Corporations financial instruments, however,
lack an available trading market as characterized by a willing buyer and
willing seller engaging in an exchange transaction. It is also the
Corporations general practice and intent to hold its financial instruments to
maturity and to not engage in trading or sales activities except for loans
held-for-sale and available-for-sale securities. Therefore, significant
estimations and assumptions, as well as present value calculations, were used
by the Corporation for the purposes of this disclosure.

Estimated
fair values have been determined by the Corporation using the best available
data and an estimation methodology suitable for each category of financial
instruments. For those loans and deposits with floating interest rates, it is
presumed that estimated fair values generally approximate the recorded book
balances. The estimation methodologies used, the estimated fair values, and the
recorded book balances at September 30, 2009 and December 31, 2008, were as
follows:

|                                                             |  |                    |           |                   |   |                |  |            |           |  |   |           | 
|------------------------------------------------------------ |  | ------------------ | --------- | ----------------- | - | -------------- |  | ---------- | --------- |  | - | --------- | 
|(in thousands)                                               |  |                    |           |                   |  
|                                                             |  | September 30, 2009 |           | December 31, 2008 |  
|                                                             |  | Carrying
 Value    |           | Fair
 Value       |   | Carrying
Value |  | Fair
Value |          
|Financial Assets:                                            |  |                    |           |                   |   |                |  |            |           |  |   |           | 
|                                                             |  |                    |           |                   |   |                |  |            |           |  |   |           | 
|Cash and due from banks                                      |  | $                  | 15,332    |                   | $ | 15,332         |  | $          | 20,163    |  | $ | 20,163    | 
|Interest-bearing deposits in financial
 institutions         |  |                    | 49,690    |                   |   | 49,690         |  |            | 98        |  |   | 98        | 
|Investment securities                                        |  |                    | 335,962   |                   |   | 336,542        |  |            | 251,115   |  |   | 251,344   | 
|Loans, net, including loans held for sale                    |  |                    | 769,933   |                   |   | 774,853        |  |            | 787,928   |  |   | 793,411   | 
|Accrued
 interest receivable                                 |  |                    | 9,543     |                   |   | 9,543          |  |            | 9,693     |  |   | 9,693     | 
|Total Financial Assets                                       |  | $                  | 1,180,460 |                   | $ | 1,185,960      |  | $          | 1,068,997 |  | $ | 1,074,709 | 
|Financial Liabilities:                                       |  |                    |           |                   |   |                |  |            |           |  |   |           | 
|                                                             |  |                    |           |                   |   |                |  |            |           |  |   |           | 
|Non-interest bearing demand deposits                         |  | $                  | 110,116   |                   | $ | 110,116        |  | $          | 110,559   |  | $ | 110,559   | 
|Interest-bearing deposits                                    |  |                    | 954,697   |                   |   | 962,150        |  |            | 851,573   |  |   | 862,165   | 
|Borrowings                                                   |  |                    | 108,313   |                   |   | 122,863        |  |            | 118,016   |  |   | 127,816   | 
|Accrued interest payable                                     |  |                    | 3,957     |                   |   | 3,957          |  |            | 4,472     |  |   | 4,472     | 
|Total Financial Liabilities                                  |  | $                  | 1,177,083 |                   | $ | 1,199,086      |  | $          | 1,084,620 |  | $ | 1,105,012 | 
|                                                             |  |                    |           |                   |   |                |  |            |           |  |   |           | 
|Unrecognized financial instruments (net of
 contract amount) |  |                    |           |                   |   |                |  |            |           |  |   |           | 
|                                                             |  |                    |           |                   |   |                |  |            |           |  |   |           | 
|Commitments to originate loans                               |  | $                  | -0-       |                   | $ | -0-            |  | $          | -0-       |  | $ | -0-       | 
|Lines of credit                                              |  |                    | -0-       |                   |   | -0-            |  |            | -0-       |  |   | -0-       | 

18

---



Financial
instruments actively traded in a secondary market have been valued using quoted
available market prices. Cash and due from banks, interest-bearing time
deposits in other banks, federal funds sold, loans held-for-sale and interest
receivable are valued at book value, which approximates fair value.

Financial
liability instruments with stated maturities have been valued using a present
value discounted cash flow analysis with a discount rate approximating current
market for similar liabilities. Interest payable is valued at book value, which
approximates fair value.

Financial
instrument liabilities with no stated maturities have an estimated fair value
equal to both the amount payable on demand and the recorded book balance.

The net
loan portfolio has been valued using a present value discounted cash flow. The
discount rate used in these calculations is the current rate at which similar
loans would be made to borrowers with similar credit ratings, same remaining
maturities, and assumed prepayment risk.

The fair
value of commitments to originate loans is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
values of letters of credit and lines of credit are based on fees currently
charged for similar agreements or on the estimated cost to terminate or
otherwise settle the obligations with the counterparties at the reporting date.

Changes in
assumptions or estimation methodologies may have a material effect on these
estimated fair values.

The Corporations
remaining assets and liabilities, which are not considered financial
instruments, have not been valued differently than has been customary with
historical cost accounting. No disclosure of the relationship value of the
Corporations core deposit base is required by ASC 825.

Fair value
estimates are based on existing balance sheet financial instruments, without
attempting to estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments. For
example, the subsidiary bank has a large fiduciary services department that
contributes net fee income annually. The fiduciary services department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage banking
operation, brokerage network, deferred taxes, premises and equipment, and
goodwill. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.

Management
believes that reasonable comparability between financial institutions may not
be likely, due to the wide range of permitted valuation techniques and numerous
estimates which must be made, given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
also introduces a greater degree of subjectivity to these estimated fair
values.

19

---



(9) INCOME TAXES

A
reconciliation of income tax expense at 34 percent of pre-tax income to the
Corporations actual tax expense (benefit) for the three and nine-month periods
ended September 30 is shown below:

|                                                     |  |                                   |      |                                  |   |      |   |      |        |   |   |       |  
|---------------------------------------------------- |  | --------------------------------- | ---- | -------------------------------- | - | ---- | - | ---- | ------ | - | - | ----- | -
|                                                     |  | Three Months Ended
 September 30, |      | Nine Months Ended
 September 30, |  
|                                                     |  | 2009                              |      | 2008                             |   | 2009 |   | 2008 |       
|Computed expected tax
 expense (benefit)           |  | $                                 | 83   |                                  | $ | 967  |   | $    | 1,182  |   | $ | 2,766 |  
|                                                     |  |                                   |      |                                  |   |      |   |      |        |   |   |       |  
|Increase (decrease) in
 income taxes resulting from: |  |                                   |      |                                  |   |      |   |      |        |   |   |       |  
|Tax-exempt income                                    |  |                                   | (483 | )                                |   | (323 | ) |      | (1,297 | ) |   | (975  | )
|State income taxes, net of federal tax benefit       |  |                                   | (24  | )                                |   | 179  |   |      | 133    |   |   | 530   |  
|Bank-owned life insurance income                     |  |                                   | (80  | )                                |   | (76  | ) |      | (245   | ) |   | (220  | )
|Other, net                                           |  |                                   | (12  | )                                |   | (89  | ) |      | (111   | ) |   | (265  | )
|                                                     |  | $                                 | (516 | )                                | $ | 658  |   | $    | (338   | ) | $ | 1,836 |  

(10) IMPACT OF NEW ACCOUNTING STANDARDS

In
December 2007, the FASB issued ASC 805, Business Combinations, which changed
multiple aspects of the accounting for business combinations. Under the
guidance in ASC 805, the acquisition method must be used, which requires the
acquirer to recognize most identifiable assets acquired, liabilities assumed,
and non-controlling interests in the acquiree at their full fair value on the
acquisition date. Goodwill is to be recognized as the excess of the
consideration transferred plus the fair value of the non-controlling interest
over the fair values of the identifiable net assets acquired. Subsequent
changes in the fair value of contingent consideration classified as a liability
are to be recognized in earnings, while contingent consideration classified as
equity is not to be re-measured. Costs such as transaction costs are to be
excluded from acquisition accounting, generally leading to recognizing expense
and additionally, restructuring costs that do not meet certain criteria at
acquisition date are to be subsequently recognized as post-acquisition costs. ASC
805 is effective for business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The implementation of ASC 805 did not have a material
impact on the Corporations financial position or results of operations.

In
December 2007, the FASB issued ASC 810, Noncontrolling
Interests in Consolidated Financial Statements  an amendment of ARB No. 51.
The Statement requires that a noncontrolling interest in a subsidiary be
reported separately within equity and the amount of consolidated net income
specifically attributable to the noncontrolling interest be identified in the
consolidated financial statements. It also calls for consistency in the manner of
reporting changes in the parents ownership interest and requires fair value
measurement of any noncontrolling equity investment retained in
deconsolidation. ASC 810 became effective for fiscal years beginning after
December 15, 2008. The application of ASC 810 did not have a material impact on
the Corporations consolidated financial statements.

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In
March 2008, the FASB issued ASC 815, Disclosures About Derivative Instruments
and Hedging Activities. ASC 815 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. ASC 815 is effective for fiscal years beginning after
November 15, 2008. The implementation of ASC 815 did not have a material impact
on its consolidated financial statements.

In
January 2009, the FASB issued ASC 325, Amendments to the Impairment and Interest
Income Measurement Guidance of EITF Issue No. 99-20. ASC 325 amends the
impairment guidance previously issued in order to achieve more consistent
determination of whether an other-than-temporary impairment (OTTI) has
occurred. This ASC amended previous guidance to more closely align the OTTI
guidance therein to the guidance in ASC 320. Retrospective application to a
prior interim or annual period is prohibited. The implementation of ASC 325 did
not have a material impact on its consolidated financial statements.

In
April 2009, the FASB issued an accounting standard which amended
other-than-temporary impairment (OTTI) guidance in GAAP for debt securities
by requiring a write-down when fair value is below amortized cost in
circumstances where: (1) an entity has the intent to sell a security; (2) it is
more likely than not that an entity will be required to sell the security
before recovery of its amortized cost basis; or (3) an entity does not expect
to recover the entire amortized cost basis of the security. If an entity
intends to sell a security or if it is more likely than not that the entity
will be required to sell the security before recovery, an OTTI write-down is
recognized in earnings equal to the entire difference between the securitys
amortized cost basis and its fair value. If an entity does not intend to sell
the security or it is not more likely than not that it will be required to sell
the security before recovery, the OTTI write-down is separated into an amount
representing credit loss, which is recognized in earnings, and an amount
related to all other factors, which is recognized in other comprehensive
income. This accounting standard does not amend existing recognition and
measurement guidance related to OTTI write-downs of equity securities. This
accounting standard also extends disclosure requirements related to debt and
equity securities to interim reporting periods. The Corporation adopted this
accounting standard on April 1, 2009. The adoption of this standard had no impact
on retained earnings and is not expected to have a material impact on the
Corporations statements of income and condition. See Note 7 for the
disclosures required under this accounting standard, which was subsequently
codified into ASC 320, Investments  Debt and Equity Securities.

In
September 2006, the FASB issued an accounting standard related to fair value
measurements, which was effective for the Corporation on January 1, 2008. This
standard defined fair value, established a framework for measuring fair value,
and expanded disclosure requirements about fair value measurements. On January
1,2008, the Corporation adopted this accounting standard related to fair value
measurements for the Corporations financial assets and financial liabilities.
The Corporation deferred adoption of this accounting standard related to fair
value measurements for the Corporations nonfinancial assets and nonfinancial
liabilities, except for those items recognized or disclosed at fair value on an
annual or more frequently recurring basis, until January 1, 2009. The adoption
of this accounting standard related to fair value measurements for the
Corporations nonfinancial assets and nonfinancial liabilities had no impact on
retained earnings and is not expected to have a material impact on the
Corporations statements of income and condition. This accounting standard was
subsequently codified into ASC Topic 820, Fair Value Measurements and
Disclosures.

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In
April 2009, the FASB issued an accounting standard which provided guidance on
estimating fair value when the volume and level of activity for an asset or
liability have significantly decreased and in identifying transactions that are
not orderly. In such instances, the accounting standard provides that
management may determine that further analysis of the transactions or quoted
prices is required, and a significant adjustment to the transactions or quoted
prices may be necessary to estimate fair value in accordance with GAAP. The
Corporation adopted this accounting standard on April 1, 2009. The provisions
in this accounting standard were applied prospectively and did not result in
significant changes to the Corporations valuation techniques. Furthermore, the
adoption of this accounting standard, which was subsequently codified into ASC
Topic 820, Fair Value Measurements and Disclosures, is not expected to have a
material impact on the Corporations statements of income and condition.

In
April 2009, the FASB issued an accounting standard related to disclosures about
the fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in
annual financial statements. The Corporation adopted this accounting standard
in preparing the Consolidated Financial Statements for the period ended June
30, 2009. As this accounting standard amended only the disclosure requirements
about the fair value of financial instruments in interim periods, the adoption
had no impact on the Corporations statements of income and condition. See Note
8 for the disclosures required under this accounting standard, which was
subsequently codified into ASC Topic 825, Financial Instruments.

On
June 30, 2009, the Corporation adopted the revisions to U S GAAP accounting
standards included in ASC Topic 855, Subsequent Events, which provides guidance
for disclosing events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The adoption of
the revised guidance did not have any effect on the results of operations or
financial position.

In
June 2009, the FASB issued an accounting standard which amends current GAAP
related to the accounting for transfers and servicing of financial assets and
extinguishments of liabilities, including the removal of the concept of a
qualifying special-purpose entity from GAAP. This new accounting standard also
clarifies that a transferor must evaluate whether it has maintained effective control
of a financial asset by considering its continuing direct or indirect
involvement with the transferred financial asset. This accounting standard is
effective for financial asset transfers occurring after December 31, 2009.
Management has not determined the impact adoption of this accounting standard
may have on the Corporations consolidated financial statements.

In
June 2009, the FASB issued an accounting standard which will require a
qualitative rather than a quantitative analysis to determine the primary
beneficiary of a variable interest entity (VIE) for consolidation purposes.
The primary beneficiary of a VIE is the enterprise that has: (1) the power to
direct the activities of the VIE that most significantly impact the VIEs economic
performance, and (2) the obligation to absorb losses of the VIE that could
potentially be significant to the VIE or the right to receive benefits of the
VIE that could potentially be significant to the VIE. This accounting standard
is effective for the Corporation on January 1, 2010. The adoption of this
accounting standard will have no impact on the Corporations statements of
income and condition.

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In
June 2009, the FASB issued ASU No. 2009-01 (formerly Statement No. 168), Topic
105  Generally Accepted Accounting Principles - FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles.
The Codification is the single source of authoritative nongovernmental U S
generally accepted accounting principles (GAAP). The Codification docs not
change current GAAP, but is intended to simplify user access to all
authoritative GAAP by providing all the authoritative literature related to a
particular topic in one place. Rules and interpretive releases of the SEC under
federal securities laws are also sources of authoritative GAAP for SEC
registrants. The Corporation adopted this standard for the interim reporting
period ending September 30, 2009. The adoption of this statement did not have a
material impact on the Corporations operating results or financial position.

(11) SUBSEQUENT EVENTS

Subsequent
events have been evaluated through October 30, 2009, which is the date the
financial statements were issued.

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Schedule 6

PRINCETON
NATIONAL BANCORP, INC. AND SUBSIDIARY 
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three and nine-month periods ended September 30, 2009 and 2008

The
following discussion provides information about Princeton National Bancorp,
Inc.s (PNBC or the Corporation) financial condition and results of
operations for the three and nine-month periods ended September 30, 2009 and
2008. This discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto. This report
contains certain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act), such as discussions of
the Corporations pricing and fee trends, credit quality and outlook,
liquidity, new business results, expansion plans, anticipated expenses and
planned schedules. The Corporation intends such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, and is
including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Corporation, are identified by
use of the words believe, expect, intend, anticipate, estimate,
project, or similar expressions. Actual results could differ materially from
the results indicated by these statements because the realization of those
results is subject to many risks and uncertainties including: the effect of the
current severe disruption in financial markets and the United States government
programs introduced to restore stability and liquidity, changes in interest
rates, general economic conditions and the weakening state of the United States
economy, legislative/regulatory changes, monetary and fiscal policies of the U.S.
government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporations market area and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including a discussion of these and additional factors that could materially
affect the Corporations financial results, is included in the Corporations
2008 Annual Report on Form 10-K under the headings Item 1. Business and Item
1A. Risk Factors.

CRITICAL ACCOUNTING
POLICIES AND USE OF SIGNIFICANT ESTIMATES

The
Corporation has established various accounting policies that govern the
application of U.S. generally accepted accounting principles in the preparation
of the Corporations financial statements. The significant accounting policies
of the Corporation are described in the footnotes to the consolidated financial
statements. Certain accounting policies involve significant judgments and
assumptions by management that have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies
to be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and assumptions, which could
have a material impact on the carrying values of assets and liabilities and the
results of operations of the Corporation.

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Allowance for Loan
Losses

The
Corporation believes the allowance for loan losses is the critical accounting
policy that requires the most significant judgments and assumptions used in the
preparation of its consolidated financial statements. We determine probable
incurred losses inherent in our loan portfolio and establish an allowance for
those losses by considering factors including historical loss rates, expected
cash flows and estimated collateral values. In assessing these factors, we use
organizational history and experience with credit decisions and related
outcomes. The allowance for loan losses represents our best estimate of losses
inherent in the existing loan portfolio. The allowance for loan losses is
increased by the provision for loan losses charged to expense and reduced by
loans charged off, net of recoveries. We evaluate our allowance for loan losses
quarterly. If our underlying assumptions later prove to be inaccurate based on
subsequent loss evaluations, the allowance for loan losses is adjusted.

We
estimate the appropriate level of allowance for loan losses by separately
evaluating impaired and non-impaired loans. A specific allowance is assigned to
an impaired loan when expected cash flows or collateral do not justify the
carrying amount of the loan. The methodology used to assign an allowance to a
non-impaired loan is more subjective. Generally, the allowance assigned to non-impaired
loans is determined by applying historical loss rates to existing loans with
similar risk characteristics, adjusted for qualitative factors including the
volume and severity of identified classified loans, changes in economic
conditions, changes in credit policies or underwriting standards, and changes
in the level of credit risk associated with specific industries and markets.
Because the economic and business climate in any given industry or market, and
its impact on any given borrower, can change rapidly, the risk profile of the
loan portfolio is continually assessed and adjusted when appropriate.
Notwithstanding these procedures, there still exists the possibility that our
assessment could prove to be significantly incorrect and that an immediate
adjustment to the allowance for loan losses would be required.

Other Real Estate
Owned

Other
real estate owned acquired through loan foreclosure is initially recorded at
fair value less costs to sell when acquired, establishing a new cost basis. The
adjustment at the time of foreclosure is recorded through the allowance for
loan losses. Due to the subjective nature of establishing the fair value when
the asset is acquired, the actual fair value of the other real estate owned or
foreclosed asset could differ from the original estimate. If it is determined
that fair value declines subsequent to foreclosure, a valuation allowance is
recorded through non-interest expense. Operating costs associated with the
assets after acquisition are also recorded as non-interest expense. Gains and
losses on the disposition of other real estate owned and foreclosed assets are
netted and posted to other non-interest expense.

Deferred Income Tax
Assets/Liabilities

Our
net deferred income tax asset arises from differences in the dates that items
of income and expense enter into our reported income and taxable income.
Deferred tax assets and liabilities are established for these items as they
arise. From an accounting standpoint, deferred tax assets are reviewed to
determine if they are realizable based on the historical level of our taxable
income, estimates of our future taxable income and the reversals of deferred
tax liabilities. In most cases, the realization of the deferred tax asset is
based on our future profitability. If we were to experience net operating
losses for tax purposes in a future period, the realization of our deferred tax
assets would be evaluated for a potential valuation reserve.

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Additionally,
the Corporation reviews its uncertain tax positions annually under FASB
Interpretation 48, Accounting for Uncertainty in Income Taxes. An uncertain tax
position is recognized as a benefit only if it is more likely than not that
the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount actually recognized is the
largest amount of tax benefit that is greater than 50% likely to be recognized
on examination. For tax positions not meeting the more likely than not test,
no tax benefit is recorded. A significant amount of judgment is applied to
determine both whether the tax position meets the more likely than not test
as well as to determine the largest amount of tax benefit that is greater than
50% likely to be recognized. Differences between the position taken by
management and that of taxing authorities could result in a reduction of a tax
benefit or increase to tax liability, which could adversely affect future
income tax expense.

Impairment of
Goodwill and Intangible Assets

Core
deposit and customer relationships, which are intangible assets with a finite
life, are recorded on our balance sheets. These intangible assets were
capitalized as a result of past acquisitions and are being amortized over their
estimated useful lives of up to 15 years. Core deposit intangible assets, with
finite lives will be tested for impairment when changes in events or
circumstances indicate that its carrying amount may not be recoverable. Core
deposit intangible assets were tested for impairment during 2008 and 2007, as
part of the goodwill impairment test and no impairment was deemed necessary.

As
a result of our acquisition activity, goodwill, an intangible asset with an
indefinite life, was reflected on our balance sheet in prior periods. Goodwill
is evaluated for impairment annually, unless there are factors present that
indicate a potential impairment, in which case, the goodwill impairment test is
performed more frequently than annually. Accordingly, as the Corporations stock
price at March 31, 2009 decreased below book value, a goodwill impairment test
was performed and no impairment was deemed necessary (see Note 3  Goodwill
and Intangible Assets in the Notes to Consolidated Financial Statements). In
the six-month period since the impairment test, the Corporation has recorded
net earnings and the stock price has improved. Therefore, there were no
impairment indicators which warranted a third party study of goodwill
impairment during the second and third quarters. Accordingly, there was no
impairment deemed necessary as of September 30, 2009.

Mortgaging Service
Rights (MSRs)

MSR
fair values are very sensitive to movements in interest rates as expected
future net servicing income depends on the projected outstanding principal
balances of the underlying loans, which can be greatly reduced by prepayments.
Prepayments usually increase when mortgage interest rates decline and decrease
when mortgage interest rates rise. For discussion regarding the impairment of
MSRs, see Note 4  Originated Mortgage Servicing Rights in the Notes to
Consolidated Financial Statements.

Fair Value
Measurements

The
fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. The Corporation estimates the fair
value of a financial instrument using a variety of valuation methods. Where
financial instruments are actively traded and have quoted market prices, quoted
market prices are used for fair value. When the financial instruments are not
actively traded, other observable market inputs, such as quoted prices of
securities with similar characteristics, may be used, if available, to
determine fair value. When observable market prices do not exist, the
Corporation estimates fair value. The Corporations valuation methods consider
factors such as liquidity and concentration concerns. Other factors such as
model assumptions, market dislocations and unexpected correlations can affect
estimates of fair value. Imprecision in
estimating these factors can impact the amount of revenue or loss recorded.

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ASC
820, Fair Value Measurements, establishes a framework for measuring the fair
value of financial instrument that considers the attributes specific to
particular assets or liabilities and establishes a three-level hierarchy for
determining fair value based on the transparency of inputs to each valuation as
of the fair value measurement date. The three levels are defined as follows:

| |                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1 -
 quoted prices (unadjusted) for identical assets or liabilities in active
 markets.                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                    
| | Level 2-
 inputs include quoted prices for similar assets and liabilities in active
 markets, quoted prices of identical or similar assets or liabilities in
 markets that are not active, and inputs that are observable for the asset or
 liability, either directly or indirectly, for substantially the full term of
 the financial instrument.
| |                                                                                                                                                                                                                                                                                                                                                    
| | Level 3 -
 inputs that are unobservable and significant to the fair value measurement.                                                                                                                                                                                                                                                             

At
the end of each quarter, the Corporation assesses the valuation hierarchy for
each asset or liability measured. From time to time, assets or liabilities may
be transferred within hierarchy levels due to changes in availability of
observable market inputs to measure fair value at the measurement date.
Transfers into or out of hierarchy levels are based upon the fair value at the
beginning of the reporting period. A more detailed description of the fair
values measured at each level of the fair value hierarchy can be found in Note
8- Fair Value of Assets and Liabilities in the Notes to Consolidated
Financial Statements.

RESULTS OF OPERATIONS

Net
income for the third quarter of 2009 was $760,000, as compared to $2,187,000 in
the third quarter of 2008. Net income available to common stockholders for the
third quarter of 2009 was $440,000, or basic and diluted earnings per common
share of $0.13, as compared to net income available to common stockholders of
$2,187,000 in the third quarter of 2008, or basic and diluted earnings per
common share of $0.66. This represents a decrease of $1,747,000 (or 79.9%), and
$0.53 per basic and diluted common share. The lower net income
figure is attributable to an increase in the provision for loan losses (as
discussed below) and insurance assessments by the FDIC, despite an 8.7% improvement in net interest income,
discussed in the paragraph below. Net income for the first nine months of 2009
was $3,815,000 or basic and diluted earnings per common share of $0.89,
compared to net income of $6,298,000, or basic earnings per common share of
$1.91 (diluted earnings per common share of $1.90) for the first nine months of
2008. This represents a decrease of $2,483,000, (39.4%) or $1.02 per basic
common share and $1.01 per diluted common share. The lower net income figure is
attributed to an increase in the amount of the provision for loan losses of
$3.7 million and an increase in the amount of federal insurance deposit
assessments of $1.8 million. The annualized return on average assets and return
on average equity were 0.24% and 3.02%, respectively, for the third quarter of
2009, compared with 0.78% and 12.54% for the third quarter of 2008. For the
nine-month periods, the annualized return on average assets and return on
average equity were 0.41% and 5.29%, respectively for 2009, compared with 0.77%
and 12.17%, respectively for 2008.

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Net
interest income before the provision for loan losses was $8,883,000 for the
third quarter of 2009, compared to $8,172,000 for the third quarter of 2008 (an
increase of $711,000 or 8.7%). This improvement is a result of an increase in
average interest-earning assets of $137.6 million in the third quarter of 2009 over
the third quarter of 2008. For the three months ended September 30, 2009,
average interest-earning assets were $1,126.4 million compared to $988.9
million for the three months ended September 30, 2008. The resulting net yield
on interest-earning assets (on a fully taxable equivalent basis) decreased to
3.40% in the third quarter of 2009 compared to 3.50% in the third quarter of
2008. Further, the net interest income figure of $8,883,000 for the third
quarter of 2009 represents an increase of $254,000 (or 3.0%) over the second
quarter of 2009. Net interest income before any provision for loan losses was
$25,907,000 for the first nine months of 2009, an increase of $2.5 million, or
10.5%, from the $23,443,000 reported for the first nine months of 2008. This is
attributable to an increase in average interest-earning assets of $117.7
million for the first nine months of 2009 as compared to the first nine months
of 2008. The resulting net yield on interest-earning assets (on a fully taxable
equivalent basis) decreased to 3.45% in the first three quarters of 2009 from
3.46% in the first three quarters of 2008.

The
Corporations provision for loan loss expense recorded each quarter is
determined by managements evaluation of the risk characteristics of the loan
portfolio. For the third quarter of 2009, PNBC had net charge-offs of $810,000,
compared to net charge-offs of $103,000 for the third quarter of 2008. For the
nine-month comparable periods, PNBC had net charge-offs of $2,350,000 in 2009
and net charge-offs of $774,000 in 2008. PNBC recorded a loan loss provision of
$2,410,000 in the third quarter of 2009 and $5,045,000 in the first nine months
of 2009 compared to a provision of $550,000 in the third quarter of 2008 and
$1,368,000 in the first nine months of 2008. The increase in provision expense
is due to the increase in non-performing loans, particularly commercial real
estate loans. The ratio of non-performing loans to total loans at September 30,
2009 is 4.99% compared to 2.15% at September 30, 2008. The Corporation has no
sub-prime loans in the portfolio, nor is there any sub-prime exposure in the
investment portfolio.

Non-interest
income totaled $2,772,000 for the third quarter of 2009, compared to $2,851,000
in the third quarter of 2008, a decrease of $79,000 (or 2.8%). Annualized
non-interest income as a percentage of average total assets decreased to 0.86%
for the third quarter of 2009 from 1.02% for the same period in 2008. The lower
figure was the result of a decrease in service charges on deposit income of
$124,000 (or 10.6%) in the comparable quarter. Year-to-date in 2009,
non-interest income totaled $9,092,000 compared to $8,755,000 for the first
three quarters of 2008, an increase of $337,000 (or 3.8%). The improvement is due
to additional gains on sales of available-for-sale securities of $468,000,
along with an increase in mortgage banking income of $446,000 (or 50.7%) period
over period. This increase in mortgage banking income is due to refinance
activity and is after the recording of an impairment of mortgage servicing
rights during the first quarter of 2009 of $556,000. These increases more than
offset declines in the categories of service charges on deposits (-11.0%), due
mainly to an 11% drop in the number of overdrafts in 2009, and trust fees
(-10.4%), which have declined due to a lower market value of the assets under
management. Annualized non-interest income as a percentage of average total
assets decreased from 1.07% for the first nine months of 2008, to 0.98% for the
same period in 2009.

Total
non-interest expense for the third quarter of 2009 was $9,001,000, an increase
of $1,373,000 (or 18.0%) from $7,628,000 in the third quarter of 2008. The
largest increase was in federal insurance deposit assessments, specifically
FDIC premiums, which went up $467,000, or 471.7%. Additionally, salaries and
employee benefits increased $362,000 (or 8.1%) in the comparable quarters and
the category of other real estate expenses increased by $283,000 (or 975.9%)
over the past year. Annualized non-interest expense as a percentage of total
average assets increased to 2.80% for the third quarter of 2009, compared to
2.72% for the same period in 2008. Year-to-date non-interest expense for the
first three quarters of 2009 was $26,477,000, an increase of $3,781,000 (or
16.7%) from the $22,696,000 for the first three quarters of 2008. Again, the
majority of the increase is in the categories of federal insurance assessments
which rose $1,822,000 (or 682.4%), and other real estate expenses which increased $670,000 (or 443.7%). Annualized
non-interest expense as a percentage of total average assets also increased to
2.86% for the first nine months of 2009, compared to 2.77% for the same period
in 2008.

28

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INCOME TAXES

The
income tax benefit totaled $516,000 for the third quarter of 2009, as compared
to a tax expense of $658,000 for the third quarter of 2008. The effective tax
rate was (211.5%) for the three month period ended September 30, 2009 and 23.1%
for the three month period ended September 30, 2008. The income tax benefit
totaled $338,000 for the first nine months of 2009, as compared to a tax
expense of $1,836,000 for the first nine months of 2008. The effective tax rate
was (9.7%) for the nine month period ended September 30, 2009 and 22.5% for the
nine month period ended September 30, 2008. The lower income tax expense is due to a lower pre-tax income coupled
with the effect of tax-exempt investment interest income. For more information
on the Corporations income taxes see Note 9  Income
Taxes in the Notes to Consolidated Financial Statements.

FDIC

On
February 27, 2009, the FDIC adopted a final rule modifying the risk-based
assessment system and setting initial base assessment rates beginning April 1,
2009, at 12 to 50 basis points and, due to extraordinary circumstances,
extended the period of the Restoration Plan to seven years. The Corporations
assessment, according to the new formula is now 17 basis points. Previously,
the quarterly assessment rate was 7 basis points. Accordingly, the new
assessment rates increased the Corporations quarterly federal insurance
expense by approximately $266,000.

On
May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special
assessment on each insured depository institutions assets minus Tier 1 capital
as of June 30, 2009, which was paid on September 30, 2009. This assessment
equated to a one-time cost of $588,000 and is reflected in the Corporations
income statement for the nine months ended September 30, 2009.

On
September 29, 2009 the Board of Directors of the FDIC adopted a Notice of
Proposed Rulemaking (NPR) that would require insured institutions to prepay
their estimated quarterly risk-based assessments for the fourth quarter of 2009
and for all of 2010, 2011 and 2012. The FDIC estimates that the total prepaid
assessments collected would be approximately $45 billion. The FDIC Board also
voted to adopt a uniform three-basis point increase in assessment rates
effective on January 1, 2011, and extend the restoration period from seven to
eight years.

Under
GAAP accounting rules, unlike special assessments, prepaid assessments would
not immediately affect bank earnings. Each institution would record the entire
amount of its assessment related to future periods as a prepaid expense (an
asset) as of December 30, 2009, the date the payment would be made. The
Corporation estimates the amount of the prepaid assessment to be approximately
$6 million.

As
of December 31, 2009, and each quarter thereafter, each institution would
record an expense (charge to earnings) for its regular quarterly assessment and
an offsetting credit to the prepaid assessment until the asset is exhausted.

29

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Once
the asset is exhausted, the institution would resume paying and accounting for
quarterly deposit insurance assessments as they currently do. They would record
an accrued expense payable each quarter for the assessment payment, which would
be made to the FDIC at the end of the following quarter.

ANALYSIS OF FINANCIAL
CONDITION

Total
assets at September 30, 2009 increased to $1,287,059,000 from $1,163,130,000 at
December 31, 2008 (an increase of $123.9 million or 10.7%). Total loan balances
decreased by $18.6 million during the nine month period to $772.2 million due
to a general slow-down in the economy and the refinancing of adjustable-rate
residential real estate loans into fixed rate products which are sold in the
secondary market. Investment balances totaled $335,962,000 at September 30,
2009, compared to $251,115,000 at December 31, 2008 (an increase of $84.8
million or 33.8%), as excess liquidity is invested due to declining loan
demand. Total deposits increased to $1,064,813,000 at September 30, 2009 from $962,132,000
at December 31, 2008 (an increase of $102.7 million or 10.7%). Comparing
categories of deposits at September 30, 2009 to December 31, 2008,
interest-bearing demand deposits increased $91.1 million (or 36.9%) as
customers have chosen to stay liquid during the low interest-rate environment.
Additionally, time deposits increased $7.7 million (or 1.4%) and savings
deposits increased $4.3 million (or 7.1%), while demand deposits decreased
$443,000 (or 0.4%). Borrowings, consisting of customer repurchase agreements,
federal funds purchased, notes payable, treasury, tax, and loan (TT&L)
deposits, and Federal Home Loan Bank advances, decreased from $118,016,000 at
December 31, 2008 to $108,313,000 at September 30, 2009 (a decrease of $9.7
million or 8.2%). The majority of this decrease was due to the repayment of the
note payable (balance of $16.05 million at December 31, 2008) with proceeds
from the sale of preferred stock under the Capital Purchase Program.

CAPITAL PURCHASE PROGRAM

On
January 23, 2009, the Corporation received $25,083,000 of equity capital by
issuing to the United States Department of Treasury 25,083 shares of the
Corporations 5.00% Series B Fixed Rate Cumulative Perpetual Preferred Stock,
no par value, with a liquidation preference of $1,000 per share and a ten-year
warrant to purchase up to 155,025 shares of the Corporations common stock, par
value $0.01 per share, at an exercise price of $24.27 per share. The proceeds
received were allocated to the preferred stock and common stock warrants based
on their relative fair values. The resulting discount on the preferred stock is
amortized against retained earnings and is reflected in the Corporations
consolidated statement of income as Preferred shares dividends, resulting in
additional dilution to the Corporations earnings per common share. The
warrants are immediately exercisable, in whole or in part, over a term of 10
years. The warrants were included in the Corporations diluted average common
shares outstanding (subject to anti-dilution). Both the preferred securities
and warrants were accounted for as additions to the Corporations regulatory
Tier 1 and total capital.

The
Series B Preferred stock is not mandatorily redeemable and will pay cumulative
dividends at a rate of 5% per year for the first five years and 9% per year
thereafter. Any redemption requires Federal Reserve approval. The Series B
Perpetual Preferred stock ranks senior to the Corporations existing authorized
Series A Junior Participating Preferred stock.

30

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A
company that participates must adopt certain standards for executive
compensation, including (a) prohibiting golden parachute payments as defined
in the Emergency Economic Stabilization Act of 2008 (EESA) to senior Executive Officers; (b) requiring
recovery of any compensation paid to senior Executive Officers based on
criteria that is later proven to be materially inaccurate; (c) prohibiting
incentive compensation that encourages unnecessary and excessive risks that
threaten the value of the financial institution; and (d) accept restrictions on
the payment of dividends and the repurchase of common stock.

ASSET QUALITY

For
the nine months ended September 30, 2009, the subsidiary bank charged off
$2,507,000 of loans and had recoveries of $157,000, compared to charge-offs of
$915,000 and recoveries of $141,000 during the nine months ended September 30,
2008. The allowance for loan losses is based on factors that include the
overall composition of the loan portfolio, types of loans, underlying
collateral, past loss experience, loan delinquencies, substandard and doubtful
credits, and such other factors that, in managements reasonable judgment,
warrant consideration. The adequacy of the allowance is monitored monthly. At September
30, 2009, the allowance was $7,759,000, 20.1% of non-performing loans and 1.00%
of total loans, compared with $5,064,000, 15.3% of non-performing loans and
0.64% of total loans at December 31, 2008. The increase in the allowance for
loan losses as a percentage of total loans is based on the increase in impaired
loans in the portfolio (discussed below).

Non-performing
loans increased to $38,513,000 or 4.99% of net loans at September 30, 2009, as
compared to $33,038,000 or 4.18% of net loans at December 31, 2008 (see the
Other Real Estate Owned section below). Non-performing loans consist of those
loans in non-accrual status (meaning interest accruals have stopped because
full collection of principal is in doubt) and loans that are ninety days or
more past due but are still accruing interest. At September 30, 2009
non-accrual loans were $38,143,000 compared to $30,383,000 at December 31,
2008. The total amount of loans ninety days or more past due and still accruing
interest at September 30, 2009 was $370,000 compared to $2,655,000 at December
31, 2008.

Impaired
loans are those loans in which it is deemed probable that the bank will be
unable to collect all amounts due, including both principal and interest. The
loan is valued by discounting the expected future cash flows from the loan to
their present value using the loans effective interest rate and comparing that
amount with the carrying value of the loan. At September 30, 2009 impaired
loans totaled $6,420,000, compared to $3,540,000 at December 31, 2008. There
was a specific loan loss reserve of $1,359,000 established for impaired loans
as of September 30, 2009 compared to a specific loan loss reserve of $818,000
at December 31, 2008. PNBCs management analyzes the allowance for loan losses
monthly and believes the current level of allowance is adequate to meet
probable losses as of September 30, 2009.

OTHER REAL ESTATE OWNED

At
September 30, 2009, the Corporation had other real estate owned of $16,182,000,
an increase of $13.7 million (or 550.7%) since December 31, 2008. Of this
increase, $11.0 million represents one commercial loan that was previously
listed as a non-performing loan. This loan was originally a participation loan
with an up-stream correspondent bank. Based on collateral values, the
Corporation made the decision to purchase their interest and continue with
foreclosure. The Corporation expects the ultimate resolution of this property
to have a positive outcome.

31

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CAPITAL RESOURCES

Federal
regulations require all financial institutions to evaluate capital adequacy by
the risk-based capital method, which makes capital requirements more sensitive
to the differences in the level of risk assets. At September 30, 2009, total
risk-based capital of PNBC was 11.51%, compared to 8.30% at December 31, 2008.
The Tier 1 capital ratio increased from 6.22% at December 31, 2008, to 7.54% at
September 30, 2009. Total stockholders equity to total assets at September 30,
2009 increased to 8.00% from 6.23% at December 31, 2008. The increase in these
ratios is due to the equity investment received from the U.S. Treasury in the
form of Preferred Stock as part of the Capital Purchase Program discussed
above.

LIQUIDITY

Liquidity
is measured by a financial institutions ability to raise funds through
deposits, borrowed funds, capital, or the sale of assets. Additional sources of
liquidity include cash flow from the repayment of loans and the maturity of
investment securities. Major uses of cash include the origination of loans and
purchase of investment securities. Cash flows provided by financing and
operating activities, offset by those used in investing activities, resulted in
a net increase in cash and cash equivalents of $44,761,000 from December 31, 2008
to September 30, 2009. This increase was primarily the result of an increase in
deposits along with the proceeds received from the issuance of preferred stock,
offset by net purchases of investments and the pay off of the Corporations
note payable. For more detailed information, see PNBCs Consolidated Statements
of Cash Flows.

FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK

The
Corporation generates agribusiness, commercial, mortgage and consumer loans to
customers located primarily in North Central Illinois. The Corporations loans
are generally secured by specific items of collateral including real property,
consumer assets and business assets. Although the Corporation has a diversified
loan portfolio, a substantial portion of its debtors ability to honor their
contracts is dependent upon economic conditions in the agricultural industry.

In
the normal course of business to meet the financing needs of its customers, the
subsidiary bank is party to financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of those instruments reflect
the extent of involvement the subsidiary bank has in particular classes of
financial instruments.

The
subsidiary banks exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The subsidiary bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. At September 30, 2009, commitments to extend credit and standby
letters of credit were approximately $138,412,000 and $4,166,000 respectively.

32

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Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
subsidiary bank evaluates each customers creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary, by the
subsidiary bank upon extension of credit is based on managements credit
evaluation of the counterparty. Collateral held varies, but may include real
estate, accounts receivable, inventory, property, plant and equipment, and income-producing
properties.

Standby
letters of credit are conditional commitments issued by the subsidiary bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan facilities to customers. The subsidiary bank secures
the standby letters of credit with the same collateral used to secure the loan.
The maximum amount of credit that would be extended under standby letters of
credit is equal to the off-balance sheet contract amount. The standby letters
of credit have terms that expire in one year or less.

LAND HELD FOR SALE

The
Corporation owns separate lots in Elburn, Aurora and Somonauk, Illinois that
have been removed from the land balance and are now shown on the Corporations
balance sheet as land held-for-sale, at the lower of cost or market. The land
in Elburn, approximately 2 acres, was purchased in 2003 for $930,000 in
anticipation of the construction of a branch facility. The land in Aurora,
consisting of two lots remaining from the original purchase of fourteen acres
in 2004 which was used to construct a branch facility has a cost basis of
$1,344,000. The land in Somonauk, acquired in 2005 during the acquisition of
FSB Bancorp, Inc., consists of approximately two acres with a cost basis of
$80,000.

LEGAL PROCEEDINGS

There
are various claims pending against the Corporations subsidiary bank, arising
in the normal course of business. Management believes, based upon consultation
with legal counsel, that liabilities arising from these proceedings, if any,
will not be material to the Corporations financial position or results of
operation.

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

There
has been no material change in market risk since December 31, 2008, as reported
in PNBCs 2008 Annual Report on Form 10-K.

EFFECTS OF INFLATION

The
consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America and practices within the
banking industry which require the measurement of financial condition and
operating results in terms of historical dollars, without considering the
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institutions performance than the
effects of general levels of inflation.

33

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PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY

The
following table sets forth (in thousands) details of average balances, interest
income and expense, and resulting annualized yields/costs for the Corporation
for the periods indicated, reported on a fully taxable equivalent basis, using
a tax rate of 34%.

|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|--------------------------------------------------------- |  | ------------------------------------- | --------- | ------------------------------------- | - | ------------ |  | ---------------- | ---- | -------- | - | ------------ |  | - | ------ |  |  | ---- | -
|                                                          |  | Nine Months Ended, September 30, 2009 |           | Nine Months Ended, September 30, 2008 |  
|                                                          |  | Average
 Balance                      |           | Interest                              |   | Yield/
 Cost |  | Average
 Balance |      | Interest |   | Yield/
 Cost | 
|Average Interest-Earning Assets                           |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Interest-bearing deposits                                 |  | $                                     | 45,982    |                                       | $ | 76           |  |                  | 0.22 | %        | $ | 2,872        |  | $ | 46     |  |  | 2.14 | %
|Taxable investment securities                             |  |                                       | 173,583   |                                       |   | 5,732        |  |                  | 4.41 | %        |   | 142,115      |  |   | 5,063  |  |  | 4.76 | %
|Tax-exempt investment securities                          |  |                                       | 120,498   |                                       |   | 5,852        |  |                  | 6.49 | %        |   | 93,179       |  |   | 4,616  |  |  | 6.62 | %
|Federal funds sold                                        |  |                                       | 176       |                                       |   | 0            |  |                  | 0.00 | %        |   | 4,222        |  |   | 66     |  |  | 2.09 | %
|Net loans                                                 |  |                                       | 745,030   |                                       |   | 33,602       |  |                  | 6.03 | %        |   | 725,138      |  |   | 36,182 |  |  | 6.66 | %
|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total interest-earning assets                             |  |                                       | 1,085,269 |                                       |   | 45,262       |  |                  | 5.58 | %        |   | 967,526      |  |   | 45,973 |  |  | 6.35 | %
|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average non-interest earning assets                       |  |                                       | 151,002   |                                       |   |              |  |                  |      |          |   | 125,445      |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total average assets                                      |  | $                                     | 1,236,271 |                                       |   |              |  |                  |      |          | $ | 1,092,971    |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average Interest-Bearing Liabilities                      |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Interest-bearing demand deposits                          |  | $                                     | 279,587   |                                       |   | 2,590        |  |                  | 1.24 | %        | $ | 255,116      |  |   | 3,523  |  |  | 1.84 | %
|Savings deposits                                          |  |                                       | 65,638    |                                       |   | 38           |  |                  | 0.08 | %        |   | 62,229       |  |   | 52     |  |  | 0.11 | %
|Time deposits                                             |  |                                       | 578,414   |                                       |   | 12,451       |  |                  | 2.88 | %        |   | 495,282      |  |   | 14,675 |  |  | 3.96 | %
|Interest-bearing demand notes issued to the U.S. Treasury |  |                                       | 942       |                                       |   | 0            |  |                  | 0.00 | %        |   | 937          |  |   | 14     |  |  | 1.99 | %
|Federal funds purchased                                   |  |                                       | 339       |                                       |   | 1            |  |                  | 0.39 | %        |   | 6,075        |  |   | 124    |  |  | 2.72 | %
|Customer repurchase agreements                            |  |                                       | 35,299    |                                       |   | 294          |  |                  | 1.11 | %        |   | 36,196       |  |   | 543    |  |  | 2.00 | %
|Advances from Federal Home Loan Bank                      |  |                                       | 32,495    |                                       |   | 722          |  |                  | 2.97 | %        |   | 15,530       |  |   | 406    |  |  | 3.49 | %
|Trust preferred securities                                |  |                                       | 25,000    |                                       |   | 1,065        |  |                  | 5.70 | %        |   | 25,000       |  |   | 1,065  |  |  | 5.69 | %
|Note payable                                              |  |                                       | 3,175     |                                       |   | 96           |  |                  | 4.04 | %        |   | 15,043       |  |   | 506    |  |  | 4.50 | %
|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total interest-bearing liabilities                        |  |                                       | 1,020,888 |                                       |   | 17,257       |  |                  | 2.26 | %        |   | 911,408      |  |   | 20,908 |  |  | 3.06 | %
|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Net yield on average interest-earning assets              |  |                                       |           |                                       | $ | 28,005       |  |                  | 3.45 | %        |   |              |  | $ | 25,065 |  |  | 3.46 | %
|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average non-interest-bearing liabilities                  |  |                                       | 117,250   |                                       |   |              |  |                  |      |          |   | 112,431      |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average stockholders equity                              |  |                                       | 98,133    |                                       |   |              |  |                  |      |          |   | 69,132       |  |   |        |  |  |      |  
|                                                          |  |                                       |           |                                       |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total average liabilities and stockholders equity        |  | $                                     | 1,236,271 |                                       |   |              |  |                  |      |          | $ | 1,092,971    |  |   |        |  |  |      |  

The following table reconciles tax-equivalent net interest income
(as shown above) to net interest income as reported on the Consolidated
Statements of Income.

|                                      |  |                                          |        |      |   |        | 
|------------------------------------- |  | ---------------------------------------- | ------ | ---- | - | ------ | 
|                                      |  | For the Nine Months Ended
 September 30, |       
|                                      |  | 2009                                     |        | 2008 |  
|Net interest income as
 stated        |  | $                                        | 25,907 |      | $ | 23,443 | 
|Tax equivalent adjustment-investments |  |                                          | 1,990  |      |   | 1,569  | 
|Tax equivalent adjustment-loans       |  |                                          | 108    |      |   | 53     | 
|                                      |  |                                          |        |      |   |        | 
|Tax equivalent net interest
 income   |  | $                                        | 28,005 |      | $ | 25,065 | 

34

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Schedule 7. Controls and Procedures

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Disclosure
 controls and procedures. We evaluated the effectiveness of the design and
 operation of our disclosure controls and procedures as of September 30, 2009.
 Our disclosure controls and procedures are the controls and other procedures
 that we designed to ensure that we record, process, summarize and report in a
 timely manner the information we must disclose in reports that we file with
 or submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer,
 and Todd D. Fanning, Executive Vice-President and Chief Financial Officer,
 reviewed and participated in this evaluation. Based on this evaluation,
 Messrs. Sorcic and Fanning concluded that, as of the date of their
 evaluation, our disclosure controls were effective.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(b) | Internal
 controls. There have not been any significant changes in our internal
 accounting controls or in other factors during the quarter ended September
 30, 2009 that could significantly affect those controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

35

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INDEX TO EXHIBITS

|                |  |                                                                                                                                          |         | 
|--------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------- | ------- | 
|Exhibit
 Number |  |                                                                                                                                          | Exhibit | 
|                |  |                                                                                                                                         
|31.1            |  | Certification
 of Tony J. Sorcic required by Rule 13a-14(a).                                                                            
|                |  |                                                                                                                                         
|31.2            |  | Certification
 of Todd D. Fanning required by Rule 13a-14(a).                                                                           
|                |  |                                                                                                                                         
|32.1            |  | Certification
 of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the
 Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. 
|                |  |                                                                                                                                         
|32.2            |  | Certification
 of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the
 Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

36

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